Prudential plc - HY19 Results - IFRS

RNS Number : 9461I
Prudential PLC
14 August 2019
 

IFRS disclosure and additional financial information

Prudential plc Half Year 2019 results

International Financial Reporting Standards (IFRS) basis results

 

CONDENSED CONSOLIDATED INCOME STATEMENT

 





2019 £m


2018* £m




Note

Half year


Half year

Full year

Profit from continuing operations:






Gross premiums earned


16,293


14,786

34,163

Outward reinsurance premiums


(520)


(363)

(886)

Earned premiums, net of reinsurance


15,773


14,423

33,277

Investment return


24,633


1,381

(6,829)

Other income


199


215

398

Total revenue, net of reinsurance

B1.4

40,605


16,019

26,846

Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance


(36,671)


(10,928)

(17,545)

Acquisition costs and other expenditure

B2

(2,711)


(3,285)

(6,386)

Finance costs: interest on core structural borrowings of shareholder-financed businesses


(226)


(189)

(410)

Gain (loss) on disposal of businesses and corporate transactions

D1

13


(57)

(80)

Total charges, net of reinsurance and gain (loss) on disposal of businesses


(39,595)


(14,459)

(24,421)

Share of profits from joint ventures and associates, net of related tax


106


82

239

Profit before tax (being tax attributable to shareholders' and policyholders' returns)note (i)


1,116


1,642

2,664

Less tax charge attributable to policyholders' returns


(220)


(43)

(80)

Profit before tax attributable to shareholders

B1.1

896


1,599

2,584

Total tax charge attributable to policyholders and shareholders

B4

(221)


(369)

(506)

Adjustment to remove tax charge attributable to policyholders' returns


220


43

80

Tax charge attributable to shareholders' returns

B4

(1)


(326)

(426)

Profit from continuing operations for the period


895


1,273

2,158

Profit from discontinued operations for the period, net of related taxnote (ii)

D2.1

645


83

855

Profit for the period


1,540


1,356

3,013









Attributable to:







Equity holders of the Company:








From continuing operations


890


1,272

2,155



From discontinued operations


645


83

855


Non-controlling interests from continuing operations


5


1

3

Profit for the period


1,540


1,356

3,013

 

Earnings per share (in pence)


2019


2018*




Note

Half year


Half year

Full year

Based on profit attributable to the equity holders of the Company:







Basic

B5







Based on profit from continuing operations


34.4p


49.5p

83.7p



Based on profit from discontinued operationsnote (ii)


25.0p


3.2p

33.2p





59.4p


52.7p

116.9p


Diluted

B5







Based on profit from continuing operations


34.4p


49.4p

83.6p



Based on profit from discontinued operationsnote (ii)


25.0p


3.2p

33.2p





59.4p


52.6p

116.8p

* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).

 

Dividends per share (in pence)


2019


2018



Note

Half year


Half year

Full year

Dividends relating to reporting period:

B6






First interim ordinary dividend


16.45p


15.67p

15.67p


Second interim ordinary dividend


-


-

33.68p

Total


16.45p


15.67p

49.35p

Dividends paid in reporting period:

B6






Current year first interim ordinary dividend


-


-

15.67p


Second interim ordinary dividend for prior year


33.68p


32.50p

32.50p

Total


33.68p


32.50p

48.17p

 

Notes

(i)     This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure is not representative of pre-tax profits attributable to shareholders. Profit before all taxes is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of with-profits funds after adjusting for taxes borne by policyholders.

(ii)    Profit from discontinued operations represents the post-tax profit contributed by the UK and Europe operations which are classified as held for distribution at 30 June 2019 (a line-by-line analysis of profit for the period for the discontinued UK and Europe operations is included in note D2.1).The 2018 comparative results have been re-presented from those previously published accordingly (as described in note A2).

 

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 





2019 £m


2018* £m




Note

Half year


Half year

Full year

Profit for the period from continuing operations


895


1,273

2,158

Other comprehensive income (loss) from continuing operations:






Items that may be reclassified subsequently to profit or loss






Exchange movements on foreign operations and net investment hedges:







Exchange movements arising during the period


95


70

344


Related tax


1


2

5





96


72

349

Net unrealised valuation movements on securities of US insurance operations classified as available-for-sale:







Net unrealised holding gains (losses) arising in the period


2,636


(1,392)

(1,606)


Deduct net gains included in the income statement on disposal and impairment


(19)


(29)

(11)





2,617


(1,421)

(1,617)


Related change in amortisation of deferred acquisition costs

C5.2

(432)


272

246


Related tax


(459)


241

288





1,726


(908)

(1,083)

Total items that may be reclassified subsequently to profit or loss


1,822


(836)

(734)

Items that will not be reclassified to profit or loss






Shareholders' share of actuarial gains and losses on defined benefit pension schemes:







Net actuarial (losses) / gains on defined benefit pension schemes


(86)


3

20


Related tax


14


(1)

(4)

Total items that will not be reclassified to profit or loss


(72)


2

16









Other comprehensive income (loss) from continuing operations for the period, net of related tax


1,750


(834)

(718)

Total comprehensive income for the period from continuing operations


2,645


439

1,440







Profit for the period from discontinued operations

D2.1

645


83

855

Other comprehensive income from discontinued operations

D2.1

4


62

57

Total comprehensive income for the period from discontinued operations


649


145

912

Total comprehensive income for the period


3,294


584

2,352









Attributable to:







Equity holders of the Company








From continuing operations


2,640


438

1,436



From discontinued operations


649


145

912


Non-controlling interests from continuing operations


5


1

4

Total comprehensive income for the period


3,294


584

2,352

* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 




 Period ended 30 June 2019 £m



Share

 capital

Share

premium

Retained

  earnings

Translation

reserve

Available

-for-sale

 securities

reserves

Shareholders'

equity 


Non-

 controlling

  interests


Total

 equity



Note

note C9

note C9









Reserves












Profit from continuing operations for the period


-

-

890

-

-

890


5


895

Other comprehensive income (loss) from continuing operations


-

-

(72)

96

1,726

1,750


-


1,750

Total comprehensive income from continuing operations for the period


-

-

818

96

1,726

2,640


5


2,645

Total comprehensive income from discontinued operations for the period


-

-

647

2

-

649


-


649

Total comprehensive income (loss) for the period


-

-

1,465

98

1,726

3,289


5


3,294













Dividends

B6

-

-

(870)

-

-

(870)


-


(870)

Reserve movements in respect of share-based payments


-

-

2

-

-

2


-


2














Share capital and share premium












New share capital subscribed

C9

-

10

-

-

-

10


-


10














Treasury shares












Movement in own shares in respect of share-based payment plans


-

-

(9)

-

-

(9)


-


(9)

Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS


-

-

1

-

-

1


-


1

Net increase (decrease) in equity


-

10

589

98

1,726

2,423


5


2,428

At beginning of period


130

1,964

14,206

1,188

(239)

17,249


18


17,267

At end of period


130

1,974

14,795

1,286

1,487

19,672


23


19,695

 




 Period ended 30 June 2018* £m



Share

 capital

Share

premium

Retained

  earnings

Translation

reserve

Available

-for-sale

 securities

reserves

Shareholders'

equity 


Non-

 controlling

  interests


Total

 equity



Note

note C9

note C9









Reserves












Profit from continuing operations for the period


-

-

1,272

-

-

1,272


1


1,273

Other comprehensive income (loss) from continuing operations


-

-

2

72

(908)

(834)


-


(834)

Total comprehensive income (loss) from continuing operations for the period


-

-

1,274

72

(908)

438


1


439

Total comprehensive income (loss) from discontinued operations for the period


-

-

148

(3)

-

145


-


145

Total comprehensive income (loss) for the period


-

-

1,422

69

(908)

583


1


584













Dividends

B6

-

-

(840)

-

-

(840)


-


(840)

Reserve movements in respect of share-based payments


-

-

(9)

-

-

(9)


-


(9)














Share capital and share premium












New share capital subscribed

C9

-

6

-

-

-

6


-


6














Treasury shares












Movement in own shares in respect of share-based payment plans


-

-

28

-

-

28


-


28

Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS


-

-

27

-

-

27


-


27

Net increase (decrease) in equity


-

6

628

69

(908)

(205)


1


(204)

At beginning of period


129

1,948

12,326

840

844

16,087


7


16,094

At end of period


129

1,954

12,954

909

(64)

15,882


8


15,890

* The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)

 





 Year ended 31 December 2018* £m



Share

 capital

Share

premium

Retained

  earnings

Translation

reserve

Available

-for-sale

 securities

reserves

Shareholders'

equity


Non-

 controlling

  interests


Total

 equity



Note

note C9

note C9









Reserves












Profit from continuing operations for the year


-

-

2,155

-

-

2,155


3


2,158

Other comprehensive income (loss) from continuing operations


-

-

16

348

(1,083)

(719)


1


(718)

Total comprehensive income (loss) from continuing operations for the year


-

-

2,171

348

(1,083)

1,436


4


1,440

Total comprehensive income from discontinued operations for the year


-

-

912

-

-

912


-


912

Total comprehensive income (loss) for the year


-

-

3,083

348

(1,083)

2,348


4


2,352













Dividends

B6

-

-

(1,244)

-

-

(1,244)


-


(1,244)

Reserve movements in respect of share-based payments


-

-

69

-

-

69


-


69

Change in non-controlling interests


-

-

-

-

-

-


7


7

Movements in respect of option to acquire non-controlling interests


-

-

(109)

-

-

(109)


-


(109)














Share capital and share premium












New share capital subscribed

C9

1

16

-

-

-

17


-


17














Treasury shares












Movement in own shares in respect of share-based payment plans


-

-

29

-

-

29


-


29

Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS


-

-

52

-

-

52


-


52

Net increase (decrease) in equity


1

16

1,880

348

(1,083)

1,162


11


1,173

At beginning of year


129

1,948

12,326

840

844

16,087


7


16,094

At end of year


130

1,964

14,206

1,188

(239)

17,249


18


17,267

* The full year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).

 

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 





2019 £m


2018 £m




Note

30 Jun


30 Jun

31 Dec

Assets






Goodwill

C5.1

510


1,620

1,857

Deferred acquisition costs and other intangible assets

C5.2

12,659


11,359

11,923

Property, plant and equipmentnote (i)


785


951

1,409

Reinsurers' share of insurance contract liabilities


10,151


9,620

11,144

Deferred tax assets

C7

2,762


2,435

2,595

Current tax recoverable


371


626

618

Accrued investment income


1,332


2,574

2,749

Other debtors


2,011


3,519

4,088

Investment properties


11


17,605

17,925

Investment in joint ventures and associates accounted for using the equity method


1,030


1,554

1,733

Loans

C3.3

12,513


16,922

18,010

Equity securities and portfolio holdings in unit trustsnote (ii)


183,670


229,707

214,733

Debt securitiesnote (ii)

C3.2

99,675


160,305

175,356

Derivative assets


1,222


3,428

3,494

Other investmentsnote (ii)


958


6,059

6,512

Deposits


1,491


12,412

11,796

Assets held for distributionnote (iii)

C1

218,324


-

-

Assets held for sale


-


12,024

10,578

Cash and cash equivalents


5,208


8,450

12,125

Total assets

C1

554,683


501,170

508,645









Equity






Shareholders' equity 


19,672


15,882

17,249

Non-controlling interests


23


8

18

Total equity


19,695


15,890

17,267









Liabilities






Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)

C4.1

285,168


405,482

409,301

Unallocated surplus of with-profits funds

C4.1

2,944


17,283

15,845

Core structural borrowings of shareholder-financed businesses

C6.1

7,441


6,367

7,664

Operational borrowings attributable to shareholder-financed businessesnote (i)

C6.2

1,664


1,618

998

Borrowings attributable to with-profits businessesnote (i)

C6.2

238


3,589

3,940

Obligations under funding, securities lending and sale and repurchase agreements


6,756


7,128

6,989

Net asset value attributable to unit holders of consolidated unit trusts

and similar funds


3,482


9,358

11,651

Deferred tax liabilities

C7

3,701


4,443

4,022

Current tax liabilities


319


415

568

Accruals, deferred income and other liabilities


10,597


13,551

15,248

Provisions


254


920

1,078

Derivative liabilities


1,037


3,149

3,506

Liabilities held for distributionnote (iii)

C1

211,387


-

-

Liabilities held for sale


-


11,977

10,568

Total liabilities

C1

534,988


485,280

491,378

Total equity and liabilities


554,683


501,170

508,645

 

Notes

(i)     As at 1 January 2019, the Group applied IFRS 16, 'Leases', using the modified retrospective approach. Under this approach, comparative information is not restated. The application of the standard has resulted in the recognition of an additional lease liability and a corresponding 'right-of-use' asset of a similar amount as at 1 January 2019. See note A3 for further details. As at 30 June 2019, right-of-use assets recognised in property, plant and equipment for continuing operations amounted to £425 million.

(ii)    Included within equity securities and portfolio holdings in unit trusts, debt securities and other investments are £8 million of lent securities as at 30 June 2019 (30 June 2018: £8,993 million; 31 December 2018: £8,278 million).

(iii)   Assets and liabilities held for distribution relate to the Group's UK and Europe operations, which have been classified as discontinued operations at 30 June 2019 and are presented above after the elimination of intra-Group balances with the continuing operations (see note C1). A line-by-line analysis of assets and liabilities for the discontinued UK and Europe operations before elimination of such intra-Group balances, is included in note D2.2. The 2018 comparative results for the assets and liabilities at 30 June 2018 and 31 December 2018 are as published and not re-presented on a basis consistent with half year 2019 (as described in note A2).

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 





2019 £m


2018* £m




Note

Half year


Half year

Full year

Cash flows from continuing operations:






Cash flows from operating activities






Profit before tax (being tax attributable to shareholders' and policyholders' returns)note (i)


1,116


1,642

2,664


Adjustments to profit before tax for non-cash movements in

operating assets and liabilities:







Investments


(29,889)


(3,439)

1,675


Other non-investment and non-cash assets


(2,075)


(58)

(1,495)


Policyholder liabilities (including unallocated surplus)


26,820


2,186

(1,229)


Other liabilities (including operational borrowings)


3,147


292

644

Other itemsnote (ii)


97


357

201

Net cash flows from operating activities


(784)


980

2,460

Cash flows from investing activities






Net cash flows from purchases and disposals of property, plant and equipment


(16)


(59)

(100)

Net cash flows from corporate transactionsnote (iii)


(72)


(132)

(331)

Net cash flows from investing activities


(88)


(191)

(431)

Cash flows from financing activities






Structural borrowings of the Group:







Shareholder-financed operations:note (iv)

C6.1







Issue of subordinated debt, net of costs


-


-

1,630



Redemption of subordinated debt


(400)


-

(434)



Fees paid to modify terms and conditions of debt issued by the Groupnote (v)


(141)


-

(33)



Interest paid


(229)


(187)

(376)

Equity capital:







Issues of ordinary share capital


10


6

17


Dividends paid

B6

(870)


(840)

(1,244)

Net remittances from discontinued operations

D2.3

356


341

654

Net cash flows from financing activities


(1,274)


(680)

214

Net increase in cash and cash equivalents from continuing operations


(2,146)


109

2,243

Net cash flows from discontinued operationsnote (vi)

D2.3

(124)


(2,380)

(1,112)

Cash and cash equivalents at beginning of period


12,125


10,690

10,690

Effect of exchange rate changes on cash and cash equivalents


(23)


31

304

Cash and cash equivalents at end of period


9,832


8,450

12,125

Comprising:







Cash and cash equivalents from continuing operations


5,208


5,030

7,376


Cash and cash equivalents from discontinued operations


4,624


3,420

4,749

* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).

 

Notes

(i)      This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders, as explained in footnote (i) of the 'Condensed Consolidated Income Statement'.

(ii)     The adjusting items to profit before tax included within other items are adjustments in respect of non-cash items together with operational interest receipts and payments, dividend receipts and tax paid.

(iii)     Net cash flows from corporate transactions include amounts paid for distribution rights and cash flows arising from the acquisitions and disposals of businesses.

(iv)    Structural borrowings of shareholder-financed businesses exclude borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed businesses and other borrowings of shareholder-financed businesses. Cash flows in respect of these borrowings are included within cash flows from operating activities. The changes in the carrying value of the structural borrowings of shareholder-financed businesses are analysed as follows:

 




Cash movements £m


Non-cash movements £m




Balance at

beginning

 of period

Issue

 of debt

Redemption

of debt

Change to

terms of debt


Foreign

exchange

movement

Change to

terms of debt

Other

movements

Balance at

end of period









note (v)




Half year 2019

7,664

-

(400)

-


8

169

-

7,441


Half year 2018

6,280

-

-

-


83

-

4

6,367


Full year 2018

6,280

1,630

(434)

(33)


210

-

11

7,664

 

(v)     In the first half of 2019, the Group agreed with the holders of two subordinated debt instruments to alter the terms and conditions of these instruments in exchange for an upfront fee and an increase in the coupon of the instruments. The upfront fee and increase in coupon rates represent a significant change in the cash flows of each instrument and therefore, in accordance with IAS 39, has resulted in an extinguishment of the old debt and recognition of a new debt at fair value, the net effect of which is a non-cash movement in debt of £169 million. The upfront fee paid of £141 million has been expensed and is shown in the cash flow statement above (see note C6.1 for further details).

(vi)    Net cash flows from discontinued operations represents the movement in cash and cash equivalents from the UK and Europe operations, which are classified as held for distribution at 30 June 2019. A detailed analysis of cash flows for the period for the discontinued UK and Europe operations is included in note D2.3. The 2018 comparative results have been re-presented from those previously published accordingly (as described in note A2).

 

NOTES TO PRIMARY STATEMENTS

 

A    BACKGROUND

A1  Basis of preparation, audit status and exchange rates

 

These condensed consolidated interim financial statements for the six months ended 30 June 2019 have been prepared in accordance with IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU). The Group's policy for preparing this interim financial information is to use the accounting policies adopted by the Group in its last consolidated financial statements, as updated by any changes in accounting policies it intends to make in its next consolidated financial statements as a result of new or amended IFRS and other policy improvements. EU-endorsed IFRS may differ from IFRSs issued by the IASB if, at any point in time, new or amended IFRS have not been endorsed by the EU. At 30 June 2019, there were no unendorsed standards effective for the period ended 30 June 2019 which impacted the condensed consolidated financial statements of the Group, and there were no differences between IFRS endorsed by the EU and IFRS issued by the IASB in terms of their application to the Group.

 

The IFRS basis results for half year 2019 and half year 2018 are unaudited. Except for re-presenting the results for UK and Europe operations as discontinued operations, the 2018 full year IFRS basis results have been derived from the 2018 statutory accounts. The auditors have reported on the 2018 statutory accounts which have been delivered to the Registrar of Companies. The auditors' report was: (i) unqualified; (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report; and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

 

The exchange rates applied for balances and transactions in currencies other than the presentational currency of the Group, pounds sterling (GBP), were:

 



Closing

rate at

 30 Jun 2019

Average

for the

6 months to

30 Jun 2019


Closing

rate at

 30 Jun 2018

Average

for the

6 months to

30 Jun 2018

Closing

rate at

 31 Dec 2018

Average

 for the

12 months to

31 Dec 2018

Local currency: £









Hong Kong

9.94

10.15


10.36

10.78

9.97

10.46


Indonesia

17,980.07

18,364.05


18,919.18

18,938.64

18,314.37

18,987.65


Malaysia

5.26

5.33


5.33

5.42

5.26

5.38


Singapore

1.72

1.76


1.80

1.83

1.74

1.80


China

8.74

8.78


8.75

8.76

8.74

8.82


India

87.85

90.62


90.46

90.37

88.92

91.25


Vietnam

29,660.27

30,087.11


30,310.96

31,329.01

29,541.15

30,732.53


Thailand

39.06

40.91


43.74

43.66

41.47

43.13


US

1.27

1.29


1.32

1.38

1.27

1.34

 

Certain notes to the financial statements present half year 2018 comparative information at constant exchange rates (CER), in addition to the reporting at actual exchange rates (AER) used throughout the condensed consolidated financial statements. AER are actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates at the balance sheet date for the statement of financial position. CER results are calculated by translating prior period results using the current period foreign exchange rate, ie current period average rates for the income statement and current period closing rates for the statement of financial position.

 

The accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group's consolidated financial statements for the year ended 31 December 2018, as disclosed in the 2018 statutory accounts, aside from those discussed in note A3 below.

 

A2  Discontinued operations

 

The Group is planning to demerge its UK and Europe operations, M&GPrudential, from the Prudential plc group in the fourth quarter of 2019. Following an assessment at 30 June 2019, in accordance with IFRS 5, 'Non-current assets held for sale and discontinued operations', the results of M&GPrudential have been classified as held for distribution and as discontinued operations at 30 June 2019 in these condensed consolidated financial statements.

 

In order to present the results of the continuing operations on a comparable basis and consistent with IFRS 5 requirements, results attributable to the discontinued UK and Europe operations in half year 2019 have been shown in a single line in the income statement with 2018 comparatives being restated accordingly. Notes B1 to B5 have been prepared on a consistent basis.

 

IFRS 5 requires the assets and liabilities of the UK and Europe operations at 30 June 2019 to be presented as single line 'assets held for distribution' and 'liabilities held for distribution' on the statement of financial position but does not permit the comparative 30 June 2018 and 31 December 2018 assets and liabilities to be re-presented as the UK and Europe operations were not classified as held for distribution at these dates. In the related balance sheet notes, prior period balances have been presented to show the amounts from discontinued operations separately from continuing operations. Additionally, in the analysis of movements in Group assets and liabilities between the beginning and end of periods, the balances of the discontinued UK and Europe operations are removed from the opening balances to show the underlying movements from continuing operations.

 

The profit from the discontinued UK and Europe operations is presented in the condensed consolidated income statement before the elimination of intragroup transactions with continuing operations in order to provide a more meaningful presentation of the position of the Group immediately after the proposed demerger.

 

The condensed consolidated statement of financial position has been presented after the elimination of all intragroup balances. 

 

A detailed analysis of the earnings performance, financial position and cash flows in the periods from the discontinued UK and Europe operations is provided in note D2, with supplementary analysis on adjusted IFRS operating profit based on longer-term investment returns by driver provided in note I(vi) within the additional financial information.

 

A3  New accounting pronouncements in 2019

 

IFRS 16, 'Leases'

The Group has adopted IFRS 16, 'Leases' from 1 January 2019. The new standard brings most leases on-balance-sheet for lessees under a single model, eliminating the distinction between operating and finance leases.

 

IFRS 16 applies primarily to operating leases of major properties occupied by the Group's businesses where Prudential is a lessee. Under IFRS 16, these leases are brought onto the Group's statement of financial position with a 'right-of-use' asset being established and a corresponding liability representing the obligation to make lease payments. The rental accrual charge in the income statement under IAS 17 is replaced with a depreciation charge for the 'right-of-use' asset and an interest expense on the lease liability leading to a more front-loaded operating lease cost profile compared to IAS 17.

 

As permitted by IFRS 16, the Group has chosen to adopt the modified retrospective approach upon transition to the new standard. Under the approach adopted, there is no adjustment to the Group's retained earnings at 1 January 2019 and the Group's 2018 comparative information is not restated. The right-of-use asset and lease liability at 1 January 2019 is set at an amount equal to the discounted remaining lease payments adjusted by any prepaid or accrued lease payment balance immediately before the date of initial application of the standard.

 

When measuring lease liabilities on adoption, the Group discounted lease payments using its incremental borrowing rate at 1 January 2019. The weighted-average rate applied is 3.4 per cent. The aggregate effect of the adoption of the standard on the statement of financial position at 1 January 2019 is shown in the tables below:

 

Consolidated statement of financial position

 

Effect of adoption of IFRS 16 at 1 January 2019 £m

Continuing operations

Discontinued operations*

Total Group

Assets




Property, plant and equipment (Right-of-use assets)

414

289

703

Total assets

414

289

703





Liabilities




Operational borrowings attributable to shareholder-financed businesses (Lease liability)

206

304

510

Borrowings attributable to with-profits businesses (Lease liability)

219

21

240

Accruals, deferred income and other liabilities (Accrued lease payment balance under IAS 17)

(11)

(36)

(47)

Total liabilities

414

289

703

* Presented within assets and liabilities held for distribution at 30 June 2019.

 

The Group has applied the practical expedient to grandfather the definition of a lease on transition. This means that IFRS 16 has been applied to all contracts, which were identified as leases in accordance with IAS 17 and IFRIC 4, 'Determining whether an Arrangement contains a Lease', entered into before 1 January 2019. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into or changed on or after 1 January 2019.

 

The Group has used the following practical expedients, in addition to the aforementioned when applying IFRS 16 to leases previously classified as operating leases under IAS 17:

 

-   Applied a single discount rate to a portfolio of leases with similar characteristics. Accordingly, for such portfolios, the incremental borrowing rates used to discount the future lease payments will be determined based on market specific risk-free rates adjusted with a margin/spread to reflect the Group's credit standing, lease term and the outstanding lease payments.

-   Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.

 

Other new accounting pronouncements

In addition to the above, the IASB has also issued the following new accounting pronouncements to be effective from 1 January 2019:

 

-   IFRIC Interpretation 23, 'Uncertainty over income tax treatments';

-   Amendments to IAS 28, 'Long-term Interests in Associates and Joint Ventures';

-   Amendments to IFRS 9, 'Prepayment features with negative compensation';

-   Annual Improvements to IFRSs 2015-2017 cycle; and

-   Amendments to IAS 19, 'Plan Amendment, Curtailment or Settlement'.

 

The Group has applied the principles within the Amendments to IAS 19, 'Plan Amendment, Curtailment or Settlement', when accounting for the changes to the pension benefits of its UK defined benefit schemes during the period. The other pronouncements have had no significant impact on the Group financial statements.

 

B    EARNINGS PERFORMANCE

 

B1  Analysis of performance by segment

 

B1.1  Segment results

 





2019 £m


2018* £m


Half year 2019 vs

half year 2018* %


2018* £m




Note

Half year


AER

Half year

CER

Half year


AER

CER


AER

Full year







notes (i),(v)

note (i)


note (i)

note (i)


note (i)

Asia:











Insurance operations


1,095


927

963


18%

14%


1,982

Asset management


103


89

92


16%

12%


182

Total Asia


1,198


1,016

1,055


18%

14%


2,164

US:











Jackson (US insurance operations)


1,203


1,001

1,064


20%

13%


1,911

Asset management


12


1

1


n/a

n/a


8

Total US


1,215


1,002

1,065


21%

14%


1,919

Total segment profit from continuing operations


2,413


2,018

2,120


20%

14%


4,083

Other income and expenditure:












Investment return and other income


24


33

33


(27)%

(27)%


52


Interest payable on core structural borrowingsnote (ii)


(226)


(189)

(189)


(20)%

(20)%


(410)


Corporate expenditurenote (iii)


(164)


(173)

(175)


5%

6%


(367)

Total other income and expenditure


(366)


(329)

(331)


(11)%

(11)%


(725)

Restructuring costs


(23)


(20)

(20)


(15)%

(15)%


(56)

Adjusted IFRS operating profit based on longer-term

investment returns from continuing operations

B1.3

2,024


1,669

1,769


21%

14%


3,302

Short-term fluctuations in investment returns on shareholder-backed business

B1.2

(1,124)


9

8


n/a

n/a


(592)

Amortisation of acquisition accounting

adjustmentsnote (iv)


(17)


(22)

(23)


23%

26%


(46)

Gain (loss) on disposal of businesses and corporate transactions

D1

13


(57)

(60)


n/a

n/a


(80)

Profit from continuing operations before tax attributable to shareholders


896


1,599

1,694


(44)%

(47)%


2,584

Tax charge attributable to shareholders' returns

B4

(1)


(326)

(343)


100%

100%


(426)

Profit from continuing operations for the period


895


1,273

1,351


(30)%

(34)%


2,158

Profit from discontinued operations for the period, net of related taxnote (v)

D2.1

645


83

83


n/a

n/a


855

Profit for the period


1,540


1,356

1,434


14%

7%


3,013














Attributable to:












Equity holders of the Company













From continuing operations


890


1,272

1,350


(30)%

(34)%


2,155



From discontinued operations


645


83

83


n/a

n/a


855


Non-controlling interests from continuing operations


5


1

1


400%

400%


3





1,540


1,356

1,434


14%

7%


3,013





2019


2018*


Half year 2019 vs

half year 2018* %


2018*




Note

Half year


AER

Half year

CER

Half year


AER

CER


AER

Full year

Basic earnings per share (in pence)

B5



notes (i),(v)

note (i)


note (i)

note (i)


note (i)

Based on adjusted IFRS operating profit based on longer-term investment returns, net of tax, from continuing operationsnote (vi)


65.3p


53.7p

57.0p


22%

15%


108.7p

Based on profit for the period from continuing operations


34.4p


49.5p

52.6p


(31)%

(35)%


83.7p

Based on profit for the period from discontinued operations


25.0p


3.2p

3.2p


681%

681%


33.2p

* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).

 

Notes

(i)     For definitions of AER and CER refer to note A1. The difference between 'Profit for the period attributable to shareholders' in the prior half year 2018 on an AER basis and a CER basis is £78 million, arising from the retranslation of the prior period results of the Group's foreign subsidiaries into GBP using the exchange rates applied to the equivalent current period results. 

(ii)    Interest charged to the income statement on debt that is capable of being substituted to M&GPrudential for the six months ended 30 June 2019 was £(85) million (see note C6.1 for further details).

(iii)   Corporate expenditure as shown above is primarily for Group Head Office and Asia Regional Head Office.

(iv)   Amortisation of acquisition accounting adjustments principally relate to the REALIC business of Jackson which was acquired in 2012.

(v)   Profit from discontinued operations represents the post-tax profit contributed by the UK and Europe operations which are classified as held for distribution at 30 June 2019 (a line-by-line analysis of profit for the period for the discontinued UK and Europe operations is included in note D2.1, with supplementary analysis on adjusted IFRS operating profit based on longer-term investment returns by driver provided in note I(vi) within the additional financial information). The 2018 comparative results have been re-presented from those previously published accordingly (as described in note A2).

(vi)   Tax charges have been reflected as operating and non-operating in the same way as for the pre-tax items. Further details on tax charges are provided in note B4.

 

B1.2  Short-term fluctuations in investment returns on shareholder-backed business

 

 

 

2019 £m

 

2018* £m

 

 

Half year

 

Half year

Full year

Asia operationsnote (i)

420

 

(326)

(512)

US operationsnote (ii)

(1,521)

 

244

(100)

Other operationsnote (iii)

(23)

 

91

20

Total

(1,124)

 

9

(592)

* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).

 

(i)    Asia operations

In Asia, the positive short-term fluctuations of £420 million (half year 2018: negative £(326) million; full year 2018: negative £(512) million) principally reflect net value movements on shareholders' assets and related liabilities following decrease in bond yields during the period.

 

(ii)   US operations

The short-term fluctuations in investment returns for US insurance operations are reported net of the related credit for amortisation of deferred acquisition costs of £476 million as shown in note C5.2 (half year 2018: charge of £(199) million; full year 2018: charge of £(114) million) and comprise amounts in respect of the following items:

 

 

 

2019 £m 

 

2018 £m

 

 

Half year

 

Half year

Full year

Net equity hedge resultnote (a)

(1,955)

 

383

(58)

Other than equity-related derivativesnote (b)

433

 

(183)

(64)

Debt securitiesnote (c)

11

 

6

(31)

Equity-type investments: actual less longer-term return

(7)

 

31

38

Other items

(3)

 

7

15

Total

(1,521)

 

244

(100)

 

Notes

(a)   Net equity hedge result

The purpose of the inclusion of this item in short-term fluctuations in investment returns is to segregate the amount included in pre-tax profit that relates to the accounting effect of market movements on both the value of guarantees in Jackson's variable annuity and fixed index annuity products and on the related derivatives used to manage the exposures inherent in these guarantees. The level of fees recognised in non-operating profit is determined by reference to that allowed for within the reserving basis. The variable annuity guarantees are valued in accordance with either Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures (formerly FAS 157) or ASC Topic 944, Financial Services - Insurance (formerly SOP 03-01) depending on the type of guarantee. Both approaches require an entity to determine the total fee ('the fee assessment') that is expected to fund future projected benefit payments arising using the assumptions applicable for that method. The method under FAS 157 requires this fee assessment to be fixed at the time of issue. As the fees included within the initial fee assessment are earned, they are included in non-operating profit to match the corresponding movement in the guarantee liability. As the Group applies US GAAP for the measured value of the product guarantees this item also includes asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the Jackson annuity business differ.

 

The net equity hedge result therefore includes significant accounting mismatches and other factors that do not represent the economic result. These other factors include:

 

-   The variable annuity guarantees and fixed index annuity embedded options being only partially fair valued under 'grandfathered' US GAAP;

-   The interest rate exposure being managed through the other than equity-related derivative programme explained in note (b) below; and

-   Jackson's management of its economic exposures for a number of other factors that are treated differently in the accounting frameworks such as future fees and assumed volatility levels.

 

The net equity hedge result can be summarised as follows:

 

 

2019 £m

 

2018 £m

 

Half year

 

Half year

Full year

Fair value movements on equity hedge instruments*

(2,466)

 

(375)

299

Accounting value movements on the variable and fixed index annuity guarantee liabilities

227

 

505

(894)

Fee assessments net of claim payments

284

 

253

537

Total

(1,955)

 

383

(58)

* Held to manage equity exposures of the variable annuity guarantees and fixed index annuity options.

 

(b)  Other than equity-related derivatives

          

The fluctuations for this item comprise the net effect of:

 

-   Fair value movements on free-standing, other than equity-related derivatives;

-   Fair value movements on the Guaranteed Minimum Income Benefit (GMIB) reinsurance asset that are not matched by movements in the underlying GMIB liability, which is not fair valued; and

-   Related amortisation of DAC.

 

The free-standing, other than equity-related derivatives, are held to manage interest rate exposures and durations within the general account and the variable annuity guarantees and fixed index annuity embedded options described in note (a) above. Accounting mismatches arise because of differences between the measurement basis and presentation of the derivatives, which are fair valued with movements recorded in the income statement, and the exposures they are intended to manage.

 

(c)   Short-term fluctuations related to debt securities

 

 

 

2019 £m 

 

2018 £m

 

 

Half year 

 

Half year

Full year

(Charges) credits in the period:

 

 

 

 

 

Losses on sales of impaired and deteriorating bonds

(19)

 

(1)

(4)

 

Bond write-downs

(1)

 

(2)

(4)

 

Recoveries/reversals

1

 

18

19

 

Total (charges) credits in the period

(19)

 

15

11

Risk margin allowance deducted from adjusted IFRS operating profit based on longer-term investment returns*

42

 

38

77

 

 

23

 

53

88

Interest-related realised (losses) gains:

 

 

 

 

 

Gains (losses) arising in the period

33

 

8

(8)

 

Amortisation of gains and losses arising in current and prior periods to adjusted IFRS operating profit based on longer-term investment returns

(46)

 

(57)

(116)

 

 

(13)

 

(49)

(124)

Related amortisation of deferred acquisition costs

1

 

2

5

Total short-term fluctuations related to debt securities

11

 

6

(31)

* The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with normalised returns included in adjusted IFRS operating profit based on longer-term investment returns with variations from period to period included in the short-term fluctuations category. The risk margin reserve charge for longer-term credit-related losses included in adjusted IFRS operating profit based on longer-term investment returns of Jackson for half year 2019 is based on an average annual risk margin reserve of 18 basis points (half year 2018: 19 basis points; full year 2018: 18 basis points) on average book values of US$60.0 billion (half year 2018: US$54.9 billion; full year 2018: US$57.1 billion) as shown below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Moody's rating category

Half year 2019

 

Half year 2018

 

Full year 2018

(or equivalent under

NAIC ratings of

mortgage-backed

 Average

 book

 value

 

RMR

 

Annual expected loss

 

Average

 book

 value

 

RMR

 

Annual expected loss

 

Average

 book

 value

 

RMR

 

Annual expected loss

securities)

US$m

 

%

 

US$m

£m

 

US$m

 

%

 

US$m

£m

 

US$m

 

%

 

US$m

£m

A3 or higher

34,318

 

0.10

 

(36)

(28)

 

26,260

 

0.11

 

(29)

(21)

 

29,982

 

0.10

 

(31)

(23)

Baa1, 2 or 3

24,385

 

0.23

 

(55)

(42)

 

27,337

 

0.20

 

(57)

(41)

 

25,814

 

0.21

 

(55)

(40)

Ba1, 2 or 3

1,008

 

0.93

 

(10)

(7)

 

978

 

1.01

 

(10)

(7)

 

1,042

 

0.98

 

(10)

(8)

B1, 2 or 3

246

 

2.62

 

(6)

(5)

 

309

 

2.61

 

(8)

(6)

 

289

 

2.64

 

(8)

(6)

Below B3

37

 

3.42

 

(1)

(1)

 

11

 

3.71

 

-

-

 

11

 

3.69

 

-

-

Total

59,994

 

0.18

 

(108)

(83)

 

54,895

 

0.19

 

(104)

(75)

 

57,138

 

0.18

 

(104)

(77)

Related amortisation of deferred acquisition costs

 

18

14

 

 

 

 

 

22

15

 

 

 

 

 

22

15

Risk margin reserve charge to adjusted IFRS operating profit for longer-term credit-related losses

 

(90)

(69)

 

 

 

 

 

(82)

(60)

 

 

 

 

 

(82)

(62)

 

Consistent with the basis of measurement of insurance assets and liabilities for Jackson's IFRS results, the charges and credits to adjusted IFRS operating profit based on longer-term investment returns are partially offset by related amortisation of deferred acquisition costs.

 

In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement of other comprehensive income is a pre-tax credit of £2,185 million for net unrealised gains on debt securities classified as available-for-sale net of related amortisation of deferred acquisition costs (half year 2018: charge of £(1,149) million for net unrealised losses; full year 2018: charge of £(1,371) million for net unrealised losses). Temporary market value movements do not reflect defaults or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C3.2(c).

 

(iii)  Other operations

Short-term fluctuations in investment returns for other operations of negative £(23) million (half year 2018: positive £91 million; full year 2018: positive £20 million) include unrealised value movements on financial instruments held outside of the main life operations.

 

B1.3        Determining operating segments and performance measure of operating segments


Operating segments

The Group's operating segments for financial reporting purposes are defined and presented in accordance with IFRS 8, 'Operating Segments' on the basis of the management reporting structure and its financial management information.

 

Under the Group's management and reporting structure its chief operating decision maker is the Group Executive Committee (GEC). In the management structure, responsibility is delegated to the Chief Executive Officers of Prudential Corporation Asia, the North American Business Unit and M&GPrudential for the day-to-day management of their business units (within the framework set out in the Group Governance Manual). Financial management information used by the GEC aligns with these three business segments. These operating segments derive revenue from both long-term insurance and asset management activities. In light of the proposed demerger, the segment analysis for the discontinued UK and Europe operations is provided in note D2, separate from those for the continuing operations.

 

Operations which do not form part of any business unit are reported as 'Unallocated to a segment'. These include Group Head Office and Asia Regional Head Office costs. The Group's existing treasury company, Prudential Capital, and the Africa operations do not form part of any operating segment under the structure, and their assets and liabilities and profit or loss before tax are not material to the overall financial position of the Group. Prudential Capital and Africa operations are therefore also reported as 'Unallocated to a segment'.

 

Performance measure    

The performance measure of operating segments utilised by the Company is adjusted IFRS operating profit based on longer-term investment returns attributable to shareholders. This measurement basis distinguishes adjusted IFRS operating profit based on longer-term investment returns from other constituents of the total profit as follows:

 

-   Short-term fluctuations in investment returns on shareholder-backed business;

-   Amortisation of acquisition accounting adjustments arising on the purchase of business. This comprises principally the charge for the adjustments arising on the purchase of REALIC in 2012; and

-   Gain or loss on corporate transactions, such as disposals undertaken in the period and the costs related to the preparation for the proposed demerger of M&GPrudential from Prudential plc.


The determination of adjusted IFRS operating profit based on longer-term investment returns for investment and liability movements is as described in note B1.3 of the Group's consolidated financial statements for the year ended 31 December 2018.

 

For Group debt securities at 30 June 2019 held by the continuing insurance operations in Asia and US, the level of unamortised interest-related realised gains and losses related to previously sold bonds and which have yet to be amortised to adjusted IFRS operating profit based on longer-term investment returns for continuing operations was a net gain of £580 million (30 June 2018: net gain of £800 million; 31 December 2018: net gain of £609 million).

 

For equity-type securities, the longer-term rates of return applied by the non-linked shareholder-financed insurance operations of Asia and the US to determine the amount of investment return included in adjusted IFRS operating profit based on longer-term investment returns are as follows:

 

-   For Asia insurance operations, investments in equity securities held for non-linked shareholder-financed operations amounted to £2,282 million as at 30 June 2019 (30 June 2018: £1,622 million; 31 December 2018: £2,146 million). The rates of return applied for 2019 ranged from 5.2 per cent to 17.6 per cent (30 June 2018: 5.1 per cent to 17.2 per cent; 31 December 2018: 5.3 per cent to 17.6 per cent) with the rates applied varying by business unit.

-   For US insurance operations, at 30 June 2019, the equity-type securities for non-separate account operations amounted to £1,178 million (30 June 2018: £1,187 million; 31 December 2018: £1,359 million). The longer-term rates of return for income and capital applied in 2019 and 2018, which reflect the combination of the average risk-free rates over the period and appropriate risk premiums, are as follows:

 

 

2019

 

2018

 

Half year

 

Half year

Full year

Equity-type securities such as common and preferred stock and portfolio holdings in mutual funds

6.0% to 6.7%

 

6.7% to 7.0%

6.7% to 7.2%

Other equity-type securities such as investments in limited partnerships and private equity funds

                                          8.0% to 8.7%

 

                                          8.7% to 9.0%

8.7% to 9.2%

 

B1.4  Additional segmental analysis of revenue from continuing operations

 

 

 

Half year 2019 £m - continuing operations

 

 

Asia

US

Total

 segment

Unallocated

to a

segment

(central

operations)

Group

total

Gross premiums earned

8,856

7,410

16,266

27

16,293

Outward reinsurance premiums

(386)

(131)

(517)

(3)

(520)

Earned premiums, net of reinsurance

8,470

7,279

15,749

24

15,773

Other incomenote (i)

176

11

187

12

199

Total external revenue

8,646

7,290

15,936

36

15,972

Intra-group revenue

16

24

40

(40)

-

Interest income

622

1,128

1,750

21

1,771

Other investment return

6,821

16,023

22,844

18

22,862

Total revenue, net of reinsurancenote (ii)

16,105

24,465

40,570

35

40,605

 

 

 

Half year 2018* £m - continuing operations

 

 

Asia

US

Total

segment

Unallocated

to a

segment

(central

operations)

Group

total

Gross premiums earned

7,736

7,036

14,772

14

14,786

Outward reinsurance premiums

(222)

(141)

(363)

-

(363)

Earned premiums, net of reinsurance

7,514

6,895

14,409

14

14,423

Other incomenote (i)

157

44

201

14

215

Total external revenue

7,671

6,939

14,610

28

14,638

Intra-group revenue

20

32

52

(52)

-

Interest income

513

940

1,453

26

1,479

Other investment return

(1,703)

1,486

(217)

119

(98)

Total revenue, net of reinsurancenote (ii)

6,501

9,397

15,898

121

16,019

 

 

 

Full year 2018* £m - continuing operations

 

 

Asia

US

Total

 segment

Unallocated

to a

segment

(central

operations)

Group

total

Gross premiums earned

16,469

17,656

34,125

38

34,163

Outward reinsurance premiums

(575)

(309)

(884)

(2)

(886)

Earned premiums, net of reinsurance

15,894

17,347

33,241

36

33,277

Other incomenote (i)

309

50

359

39

398

Total external revenue

16,203

17,397

33,600

75

33,675

Intra-group revenue

42

50

92

(92)

-

Interest income

1,086

2,016

3,102

51

3,153

Other investment return

(3,240)

(6,804)

(10,044)

62

(9,982)

Total revenue, net of reinsurancenote (ii)

14,091

12,659

26,750

96

26,846

* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).

 

Notes

(i)     Other income comprises income from external customers and consists primarily of revenue from the Group's continuing asset management business of £153 million (half year 2018: £108 million; full year 2018: £216 million). The remaining other income consists primarily of policy fee revenue from external customers.

(ii)    Total revenue from continuing operations excludes the contribution from the discontinued UK and Europe operations which are classified as held for distribution at 30 June 2019 (a line-by-line analysis of revenue for the period for the discontinued UK and Europe operations is included in note D2.1). The 2018 comparative results have been re-presented from those previously published accordingly (as described in note A2).

 

B2  Acquisition costs and other expenditure from continuing operations

 

 

2019 £m

 

2018* £m

 

Half year

 

Half year

Full year

Acquisition costs incurred for insurance policies

(1,630)

 

(1,538)

(3,230)

Acquisition costs deferred less amortisation of acquisition costsnote (i)

774

 

(61)

44

Administration costs and other expenditurenote (ii)

(1,771)

 

(1,625)

(2,903)

Movements in amounts attributable to external unit holders

of consolidated investment funds

(84)

 

(61)

(297)

Total acquisition costs and other expenditure from continuing operations

(2,711)

 

(3,285)

(6,386)

* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).

 

Notes

(i)     The components of 'acquisition costs deferred less amortisation of acquisition costs' of £774 million in half year 2019 are set out in note C5.2.

(ii)    Included in total administration costs and other expenditure for half year 2019 is depreciation of property, plant and equipment of £(83) million (half year 2018: £(34) million; full year 2018: £(69) million). Out of the £(83) million of depreciation of property, plant and equipment for half year 2019, £(51) million relates to the right-of-use assets recognised under IFRS 16 adopted in 2019 (as described in note A3).

 

B3  Effect of changes and other accounting matters on insurance assets and liabilities

 

The following matters are relevant to the determination of the half year 2019 results:

 

(a)   Asia insurance operations

In half year 2019, the adjusted IFRS operating profit based on longer-term investment returns for Asia insurance operations included a net credit of £76 million (half year 2018: £69 million; full year 2018: £94 million) representing a small number of items that are not expected to reoccur, including the impact of a refinement to the run-off of the allowance for prudence within technical provisions. 

 

(b)   US insurance operations

There has been no material change in assumptions underpinning insurance assets and liabilities since full year 2018.

 

(c)   UK and Europe insurance operations

Changes in the allowance for credit risk for annuity business, mortality and other assumptions are discussed in note D2.2 following the classification of the Group's UK and Europe operations as discontinued at 30 June 2019.

 

B4  Tax charge from continuing operations

 

B4.1  Total tax charge by nature of expense from continuing operations

 

The total tax charge for continuing operations in the income statement is as follows:

 

 

 

2019 £m

 

2018* £m

Tax charge

Current

 tax

Deferred

 tax

Half year

Total

 

Half year

Total

Full year

Total

Attributable to shareholders:

 

 

 

 

 

 

 

Asia operations

(139)

(49)

(188)

 

(139)

(277)

 

US operations

(130)

241

111

 

(216)

(255)

 

Other operations

84

(8)

76

 

29

106

Tax (charge) credit attributable to shareholders' returns

(185)

184

(1)

 

(326)

(426)

Attributable to policyholders:

 

 

 

 

 

 

 

Asia operations

(54)

(166)

(220)

 

(43)

(80)

Total tax (charge) credit

(239)

18

(221)

 

(369)

(506)

* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).

 

The principal reason for the decrease in the tax charge attributable to shareholders' returns from continuing operations is the result of the tax credit on US derivative losses largely eliminating the tax charge on Asia profits.

 

B4.2  Shareholder profit and tax charge from continuing operations

 

The shareholder profit, tax charge (credit) and effective tax rate for continuing operations are as follows:

 

 

 

Half year 2019 £m

 

 

Asia

operations

US

operations

Other

operations

Total

 attributable to

shareholders

Adjusted IFRS operating profit (loss) based on longer-term investment returns

1,198

1,215

(389)

2,024

Non-operating profit (loss)

627

(1,536)

(219)

(1,128)

Profit (loss) before tax

1,825

(321)

(608)

896

Tax charge (credit) on:

 

 

 

 

 

Adjusted IFRS operating profit (loss) based on longer-term investment returns

168

203

(39)

332

 

Non-operating profit (loss)

20

(314)

(37)

(331)

Total actual tax charge (credit)

188

(111)

(76)

1

Actual tax rate on:

 

 

 

 

 

Adjusted IFRS operating profit based on longer-term investment returns

14%

17%

10%

16%

 

Profit before tax

10%

35%

13%

0%

 

 

 

Half year 2018* £m

 

 

Asia

operations

US

operations

Other operations

Total

 attributable to

shareholders

Adjusted IFRS operating profit (loss) based on longer-term investment returns

1,016

1,002

(349)

1,669

Non-operating (loss) profit

(338)

184

84

(70)

Profit (loss) before tax

678

1,186

(265)

1,599

Tax charge (credit) on:

 

 

 

 

 

Adjusted IFRS operating profit (loss) based on longer-term investment returns

151

177

(41)

287

 

Non-operating (loss) profit

(12)

39

12

39

Total actual tax charge (credit)

139

216

(29)

326

Actual tax rate on:

 

 

 

 

 

Adjusted IFRS operating profit based on longer-term investment returns

15%

18%

12%

17%

 

Profit before tax

21%

18%

11%

20%

* The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations (as described in note A2).

 

 

Full year 2018* £m

 

 

Asia

operations

US

operations

Other

operations

Total

 attributable to

shareholders

Adjusted IFRS operating profit (loss) based on longer-term investment returns

2,164

1,919

(781)

3,302

Non-operating (loss) profit

(527)

(180)

(11)

(718)

Profit (loss) before tax

1,637

1,739

(792)

2,584

Tax charge (credit) on:

 

 

 

 

 

Adjusted IFRS operating profit (loss) based on longer-term investment returns

308

301

(110)

499

 

Non-operating (loss) profit

(31)

(46)

4

(73)

Total actual tax charge (credit)

277

255

(106)

426

Actual tax rate on:

 

 

 

 

 

Adjusted IFRS operating profit based on longer-term investment returns

14%

16%

14%

15%

 

Profit before tax

17%

15%

13%

16%

* The full year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations (as described in note A2).

 

B4.3  Reconciliation of shareholder effective tax rate from continuing operations

 

In the reconciliation below, the expected tax rates reflect the corporation tax rates that are expected to apply to the taxable profit of the relevant business. Where there are profits of more than one jurisdiction, the expected tax rates reflect the corporation tax rates weighted by reference to the amount of profit contributing to the aggregate business result.

 

 

 

 

2019

 

 

2018

 

 

 

 

Half year

 

Half year

Full year

 

 

 

£m

%

 

£m

%

 

£m

%

 

 

 

 

note (i)

 

note (iv)

note (iv)

 

note (iv)

note (iv)

Profit before tax

896

 

 

1,599

 

 

2,584

 

Expected tax rate (ETR)

20%

 

 

22%

 

 

22%

 

Tax at the expected rate

179

20.0%

 

352

22.0%

 

568

22.0%

 

 

 

 

 

 

 

 

 

 

 

 

Effects of recurring tax reconciliation items and percentage impact on ETR:

 

 

 

 

 

 

 

 

 

 

Income not taxable or taxable at concessionary rates

(54)

(6.0)%

 

(19)

(1.2)%

 

(53)

(2.1)%

 

 

Deductions not allowable for tax purposes

23

2.6%

 

25

1.6%

 

52

2.0%

 

 

Items related to taxation of life insurance businessesnote (ii)

(138)

(15.4)%

 

(36)

(2.3)%

 

(96)

(3.7)%

 

 

Deferred tax adjustments

(9)

(1.0)%

 

(17)

(1.1)%

 

(41)

(1.6)%

 

 

Effect of results of joint ventures and associates

(27)

(3.0)%

 

(20)

(1.3)%

 

(61)

(2.4)%

 

 

Irrecoverable withholding taxes

21

2.3%

 

26

1.8%

 

47

1.8%

 

 

Other

4

0.4%

 

-

-

 

6

0.3%

 

 

Total

(180)

(20.1)%

 

(41)

(2.5)%

 

(146)

(5.7)%

 

Effects of non-recurring tax reconciliation items and percentage impact on ETR:

 

 

 

 

 

 

 

 

 

 

Adjustments to tax charge in relation to prior years

15

1.7%

 

7

0.4%

 

(3)

(0.1)%

 

 

Movements in provisions for open tax mattersnote (iii)

6

0.7%

 

8

0.5%

 

7

0.3%

 

 

Adjustments in relation to business disposals

(19)

(2.2)%

 

-

-

 

-

-

 

 

Total

2

0.2%

 

15

0.9%

 

4

0.2%

 

 

 

 

 

 

 

 

 

 

 

Total actual tax charge

1

0.1%

 

326

20.4%

 

426

16.5%

 

Notes

(i)     The main driver of the Group's effective tax rate is the relative mix of the profits between jurisdictions with higher tax rates (such as Indonesia and Malaysia), jurisdictions with lower tax rates (such as Hong Kong and Singapore) and jurisdictions with rates in between (such as the UK and the US). At half year 2019, the reduction in the effective tax rate is a result of the loss before tax in US operations.

(ii)    The £138 million reconciling item related to taxation of life insurance businesses for half year 2019 (half year 2018: £36 million; full year 2018: £96 million) mainly reflects £82 million in the Hong Kong business in relation to investment gains which are not subject to tax due to the taxable profit being computed as 5 per cent of net insurance premiums.

(iii)   The statement of financial position contains the following provisions in relation to open tax matters:

 

 

 

 

£m

 

At 31 December 2018

(149)

 

 

Movements in the current period included in tax charge attributable to shareholders

(6)

 

 

Other movements*

(1)

 

At 30 June 2019

(156)

* Other movements include interest arising on open tax matters and amounts included in the Group's share of profits from joint ventures and associates, net of related tax.

 

(iv)    The Group's UK and Europe operations are classified as held for distribution at 30 June 2019. The 2018 comparative results have been re-presented from those previously published accordingly (as described in note A2).

 

B5  Earnings per share

 

 

 

 

Half year 2019

 

 

 

Before

 tax

Tax    

Non-controlling interests

Net of tax

and non-

controlling interests

Basic

earnings

 per share

Diluted

 earnings

 per share

 

 

 

£m

£m

£m

£m

pence

pence

 

 

Note

B1.1

B4

 

 

 

 

Based on adjusted IFRS operating profit based on longer-term investment returns

 

2,024

(332)

(5)

1,687

65.3p

65.3p

Short-term fluctuations in investment returns on shareholder-backed business

B1.2

(1,124)

314

-

(810)

(31.4)p

(31.4)p

Amortisation of acquisition accounting adjustments

 

(17)

3

-

(14)

(0.5)p

(0.5)p

Gain (loss) on disposal of businesses and corporate transactions

 

13

14

-

27

1.0p

1.0p

Based on profit for the period from continuing operations

 

896

(1)

(5)

890

34.4p

34.4p

Based on profit for the period from discontinued operations

D2.1

817

(172)

-

645

25.0p

25.0p

Based on profit for the period

 

1,713

(173)

(5)

1,535

59.4p

59.4p

 

 

 

 

Half year 2018*

 

 

 

Before

 tax

Tax    

Non-controlling interests

Net of tax

and non-

controlling interests

Basic

earnings

 per share

Diluted

 earnings

 per share

 

 

 

£m

£m

£m

£m

pence

pence

 

 

Note

B1.1

B4

 

 

 

 

Based on adjusted IFRS operating profit based on longer-term investment returns

 

1,669

(287)

(1)

1,381

53.7p

53.6p

Short-term fluctuations in investment returns on shareholder-backed business

B1.2

9

(51)

-

(42)

(1.6)p

(1.6)p

Amortisation of acquisition accounting adjustments

 

(22)

4

-

(18)

(0.7)p

(0.7)p

Gain (loss) on disposal of businesses and corporate transactions

 

(57)

8

-

(49)

(1.9)p

(1.9)p

Based on profit for the period from continuing operations

 

1,599

(326)

(1)

1,272

49.5p

49.4p

Based on profit for the period from discontinued operations

D2.1

101

(18)

-

83

3.2p

3.2p

Based on profit for the period

 

1,700

(344)

(1)

1,355

52.7p

52.6p

 

 

 

 

Full year 2018*

 

 

 

Before

 tax

Tax    

Non-controlling interests

Net of tax

and non-

controlling interests

Basic

earnings

 per share 

Diluted

 earnings

 per share

 

 

 

£m 

£m 

£m 

£m 

pence

pence

 

 

Note

B1.1

B4

 

 

 

 

Based on adjusted IFRS operating profit based on longer-term investment returns

 

3,302

(499)

(3)

2,800

108.7p

108.6p

Short-term fluctuations in investment returns on shareholder-backed business

B1.2

(592)

52

-

(540)

(21.0)p

(21.0)p

Amortisation of acquisition accounting adjustments

 

(46)

9

-

(37)

(1.4)p

(1.4)p

Gain (loss) on disposal of businesses and corporate transactions

 

(80)

12

-

(68)

(2.6)p

(2.6)p

Based on profit for the year from continuing operations

 

2,584

(426)

(3)

2,155

83.7p

83.6p

Based on profit for the year from discontinued operations

D2.1

1,051

(196)

-

855

33.2p

33.2p

Based on profit for the year

 

3,635

(622)

(3)

3,010

116.9p

116.8p

* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations at 30 June 2019 (as described in note A2).

 

Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling interests.

 

The weighted average number of shares for calculating earnings per share, which excludes those held in employee share trusts and consolidated unit trusts and OEICs, is set out as below:

 

Weighted average number (in millions) of shares

2019

 

2018

for calculation of:

Half year

 

Half year

Full year

 

Basic earnings per share

2,583

 

2,573

2,575

 

Diluted earnings per share

2,584

 

2,574

2,576

 

B6  Dividends

 

 

 

Half year 2019

 

Half year 2018

 

Full year 2018

 

Pence per share

£m

 

Pence per share

£m

 

Pence per share

£m

Dividends relating to reporting period:

 

 

 

 

 

 

 

 

 

First interim ordinary dividend

16.45p

428

 

15.67p

406

 

15.67p 

406

 

Second interim ordinary dividend

-

-

 

-

-

 

33.68p 

873

Total

16.45p

428

 

15.67p

406

 

49.35p 

1,279

Dividends paid in reporting period:

 

 

 

 

 

 

 

 

 

Current year first interim ordinary dividend

-

-

 

-

-

 

15.67p 

404

 

Second interim ordinary dividend for prior year

33.68p 

870

 

32.50p 

840

 

32.50p 

840

Total

33.68p 

870

 

32.50p 

840

 

48.17p 

1,244

 

Dividend per share

The 2019 first interim dividend of 16.45 pence per ordinary share will be paid on 26 September 2019 in sterling to shareholders in the UK, and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on 26 September 2019. The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 13 August 2019. Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 3 October 2019. The exchange rate at which the dividend payable to the US Shareholders will be translated into US dollars will be determined by the depositary agent. The second interim dividend will be paid on or about 3 October 2019 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The exchange rate at which the dividend payable to the SG Shareholders will be translated from Hong Kong dollars into Singapore dollars, will be determined by CDP.

 

Shareholders on the UK register are eligible to participate in a Dividend Reinvestment Plan.

 

C    BALANCE SHEET NOTES

 

C1  Analysis of Group statement of financial position by segment

 

To explain the assets, liabilities and capital of the Group's businesses more comprehensively, it is appropriate to provide analyses of the Group's statement of financial position by operating segment and type of business.

 

 

 

 

 

30 Jun 2019 £m

 

2018 £m

 

 

 

 

 

 

 

 

Before elimination of

intra-group debtors

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and creditors

 

Elimination

 

 

 

 

 

 

 

 

 

Asia

US

Unallocated

to a segment

(central

operations)

 

Total

continuing

operations

Discontinued

UK and Europe

operations

 

of intra-

group

debtors

and

creditors

 

Group

Total

 

30 Jun

Group

Total

31 Dec

Group

Total

By operating segment

Note

C2.1

C2.2

note (i)

 

 

note (v)

 

 

 

 

 

note (v)

note (v)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

C5.1

510

-

-

 

510

-

 

-

 

510

 

1,620

1,857

Deferred acquisition costs and other intangible assets

C5.2

3,624

8,990

45

 

12,659

-

 

-

 

12,659

 

11,359

11,923

Reinsurers' share of insurance contract liabilitiesnote (ii)

 

3,621

6,527

3

 

10,151

-

 

-

 

10,151

 

9,620

11,144

Other assetsnote (iii)

 

4,319

3,908

2,525

 

10,752

-

 

(3,491)

 

7,261

 

10,105

11,459

Investment properties

 

5

6

-

 

11

-

 

-

 

11

 

17,605

17,925

Investment in joint ventures and associates accounted for using the equity method

 

1,030

-

-

 

1,030

-

 

-

 

1,030

 

1,554

1,733

Financial investments

 

93,476

203,898

2,155

 

299,529

-

 

-

 

299,529

 

428,833

429,901

Assets held for distribution

D2.2

-

-

-

 

-

221,126

 

(2,802)

 

218,324

 

-

-

Assets held for sale

 

-

-

-

 

-

-

 

-

 

-

 

12,024

10,578

Cash and cash equivalents

 

2,222

1,184

1,802

 

5,208

-

 

-

 

5,208

 

8,450

12,125

Total assets

 

108,807

224,513

6,530

 

339,850

221,126

 

(6,293)

 

554,683

 

501,170

508,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

7,656

6,752

(2,993)

 

11,415

8,280

 

-

 

19,695

 

15,890

17,267

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)

C4.1(i)

84,077

202,152

47

 

286,276

-

 

(1,108)

 

285,168

 

405,482

409,301

Unallocated surplus of with-profits funds

C4.1(i)

3,034

-

-

 

3,034

-

 

(90)

 

2,944

 

17,283

15,845

Core structural borrowings of shareholder-financed businesses

C6.1

-

196

7,245

 

7,441

-

 

-

 

7,441

 

6,367

7,664

Operational borrowings attributable to shareholder-financed businesses

C6.2(i)

137

800

727

 

1,664

-

 

-

 

1,664

 

1,618

998

Borrowings attributable to with-profits businesses

C6.2(ii)

238

-

-

 

238

-

 

-

 

238

 

3,589

3,940

Other liabilitiesnote (iv)

 

13,665

14,613

1,504

 

29,782

-

 

(3,636)

 

26,146

 

38,964

43,062

Liabilities held for distribution

D2.2

-

-

-

 

-

212,846

 

(1,459)

 

211,387

 

-

-

Liabilities held for sale

 

-

-

-

 

-

-

 

-

 

-

 

11,977

10,568

Total liabilities

 

101,151

217,761

9,523

 

328,435

212,846

 

(6,293)

 

534,988

 

485,280

491,378

Total equity and liabilities

 

108,807

224,513

6,530

 

339,850

221,126

 

(6,293)

 

554,683

 

501,170

508,645

 

Notes

(i)     Unallocated to a segment includes central operations, the Group's existing treasury company, Prudential Capital, and Africa operations as per note B1.3.

(ii)    Reinsurers' share of contract liabilities of £10,151 million at 30 June 2019 includes the reinsurance ceded in respect of the acquired REALIC business by the Group's US insurance operations. In addition to this REALIC reinsurance, the balances in 2018 also included the reinsurance of part of the UK shareholder-backed annuity portfolio.

(iii)   'Other assets' at 30 June 2019 included property, plant and equipment of £785 million relating to continuing operations (30 June 2018: £951 million, of which £363 million related to continuing operations; 31 December 2018: £1,409 million, of which £378 million related to continuing operations). On 1 January 2019, £414 million of right-of-use assets was recognised for continuing operations upon adoption of IFRS 16 (see note A3). During the period, the Group made additions of £82 million for continuing operations of which £66 million relates to right-of-use assets.

Contained within 'Other assets' is premiums receivable of £564 million, of which 91 per cent are due within one year (30 June 2018: premiums receivable for total continuing and discontinued operations of £595 million, of which 89 per cent are due within one year; 31 December 2018: premiums receivable for total continuing and discontinued operations of £672 million, of which 73 per cent are due within one year.

(iv)   Within 'Other liabilities' at 30 June 2019 is accruals, deferred income and other liabilities of £10,597 million for continuing operations (30 June 2018: £13,551 million for continuing and discontinued operations; 31 December 2018: £15,248 million for continuing and discontinued operations), of which £6,722 million (30 June 2018: £8,435 million; 31 December 2018: £9,968 million) are due within one year.

(v)   Assets and liabilities held for distribution relate to the Group's UK and Europe operations classified as discontinued operations at 30 June 2019. A line-by-line analysis of assets and liabilities for the discontinued UK and Europe operations (before elimination of intra-group balances with continuing operations) is included in note D2.2). The 2018 comparative results for the assets and liabilities at 30 June 2018 and 31 December 2018 are as published and not restated (as described in note A2).

 

C2  Analysis of segment statement of financial position by business type

 

To show the statement of financial position by reference to the differing degrees of policyholder and shareholder economic interest of the different types of business, the analysis below is structured to show the assets and liabilities of each segment by business type.

 

C2.1  Asia

 

 

 

 

 

30 Jun 2019 £m

 

2018 £m

 

 

 

 

 

Total insurance

 

 

 

 

 

 

 

 

 

 

Note

With

-profits

business*

Unit

-linked

assets

and

liabilities

Other

business

Total

Asset-

 manage

ment

Elimina-

tions

Total

 

30 Jun

Total

31 Dec

Total

Assets

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

-

-

252

252

258

-

510

 

306

498

Deferred acquisition costs and other intangible assets

 

58

-

3,554

3,612

12

-

3,624

 

2,614

2,937

Reinsurers' share of insurance contract liabilities

 

83

-

3,538

3,621

-

-

3,621

 

2,258

2,777

Other assets

 

2,526

315

1,357

4,198

156

(35)

4,319

 

3,298

3,916

Investment properties

 

-

-

5

5

-

-

5

 

5

5

Investment in joint ventures and associates accounted for using the equity method

 

-

-

859

859

171

-

1,030

 

867

991

Financial investments

 

54,687

18,492

20,134

93,313

163

-

93,476

 

75,913

80,886

Cash and cash equivalents

 

534

400

1,179

2,113

109

-

2,222

 

2,177

2,189

Total assets

 

57,888

19,207

30,878

107,973

869

(35)

108,807

 

87,438

94,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

-

-

7,077

7,077

579

-

7,656

 

5,741

6,428

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)

C4.2

48,041

17,594

18,442

84,077

-

-

84,077

 

66,821

73,216

Unallocated surplus of with-profits funds

C4.2

3,034

-

-

3,034

-

-

3,034

 

3,766

2,511

Operational borrowings attributable to shareholder-financed businesses

 

-

36

88

124

13

-

137

 

17

61

Borrowings attributable to with-profits businesses

 

238

-

-

238

-

-

238

 

32

19

Other liabilities

 

6,575

1,577

5,271

13,423

277

(35)

13,665

 

11,061

11,964

Total liabilities

 

57,888

19,207

23,801

100,896

290

(35)

101,151

 

81,697

87,771

Total equity and liabilities

 

57,888

19,207

30,878

107,973

869

(35)

108,807

 

87,438

94,199

* The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore operations. 'Other business' includes assets and liabilities of other participating businesses and other non-linked shareholder-backed business.

 




30 Jun 2019 £m


2018 £m





Total insurance









Note

Variable

 annuity

 separate

 account 

assets

and

liabilities

Fixed

 annuity,

GICs and

 other

business

Total

Asset

 manage-

ment

Elimina-

tions

Total


30 Jun

Total

31 Dec

Total

Assets











Goodwill


-

-

-

-

-

-


-

-

Deferred acquisition costs and other intangible assets


-

8,990

8,990

-

-

8,990


8,503

8,747

Reinsurers' share of insurance contract liabilities


-

6,527

6,527

-

-

6,527


6,436

6,662

Other assets


-

3,834

3,834

143

(69)

3,908


3,381

3,588

Investment properties


-

6

6

-

-

6


5

6

Financial investments


145,295

58,585

203,880

18

-

203,898


183,501

182,910

Cash and cash equivalents


-

1,130

1,130

54

-

1,184


1,174

3,005

Total assets


145,295

79,072

224,367

215

(69)

224,513


203,000

204,918













Total equity


-

6,702

6,702

50

-

6,752


5,100

5,624

Liabilities











Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)

C4.3

145,295

56,857

202,152

-

-

202,152


185,150

185,600

Core structural borrowings of shareholder-financed businesses


-

196

196

-

-

196


189

196

Operational borrowings attributable to shareholder-financed businesses


-

767

767

33

-

800


262

328

Other liabilities


-

14,550

14,550

132

(69)

14,613


12,299

13,170

Total liabilities


145,295

72,370

217,665

165

(69)

217,761


197,900

199,294

Total equity and liabilities


145,295

79,072

224,367

215

(69)

224,513


203,000

204,918

 

C3  Assets and liabilities

 

C3.1  Group assets and liabilities - measurement

 

(a)   Determination of fair value

The fair values of the financial instruments for which fair valuation is required under IFRS are determined by the use of current market bid prices for exchange-quoted investments, or by using quotations from independent third parties, such as brokers and pricing services or by using appropriate valuation techniques.

The estimated fair value of derivative financial instruments reflects the estimated amount the Group would receive or pay in an arm's length transaction. This amount is determined using quoted prices if exchange listed, quotations from independent third parties or valued internally using standard market practices. 

Other than the loans which have been designated at fair value through profit or loss, the loans and receivables have been shown net of provisions for impairment. The fair value of loans has been estimated from discounted cash flows expected to be received. The discount rate used is updated for the market rate of interest where applicable.

The fair value of investment properties is based on market values as assessed by professionally qualified external valuers or by the Group's qualified surveyors.

The fair value of the subordinated and senior debt issued by the parent company is determined using quoted prices from independent third parties.

 

The fair value of financial liabilities (other than derivative financial instruments) is determined using discounted cash flows of the amounts expected to be paid.

(b)   Fair value measurement hierarchy of Group assets and liabilities

Assets and liabilities carried at fair value on the statement of financial position

The table below shows the assets and liabilities carried at fair value analysed by level of the IFRS 13 'Fair Value Measurement' defined fair value hierarchy. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that is significant to that measurement.

 

The analysis of the fair value measurement hierarchy of the Group's assets and liabilities at 30 June 2019 below excludes the analysis for the Group's UK and Europe operations which are classified as held for distribution. A separate fair value measurement hierarchy analysis at 30 June 2019 for the UK and Europe is presented in note D2.2. In line with the IFRS requirements, the comparatives have not been re-presented for the assets and liabilities classified for held for distribution in the current period.

 

All assets and liabilities held at fair value are classified as fair value through profit or loss, except for £44,178 million (30 June 2018: £35,860 million; 31 December 2018: £40,849 million) of debt securities in the US operations classified as available-for-sale. All assets and liabilities held at fair value are measured on a recurring basis. As of 30 June 2019, the Group does not have any financial instruments that are measured on a non-recurring basis.

 

Financial instruments at fair value

 



30 Jun 2019 £m


Level 1

Level 2

Level 3


Analysis of financial investments, net of derivative liabilities by business type from continuing operations

Quoted prices

(unadjusted)

 in active markets

Valuation

based on

significant

observable

market inputs

Valuation

based on

significant

unobservable

market inputs

Total

With-profits





Loans

-

-

-

-

Equity securities and portfolio holdings in unit trusts

19,318

1,906

153

21,377

Debt securities

28,964

3,093

6

32,063

Other investments (including derivative assets)

107

81

-

188

Derivative liabilities

(34)

(11)

-

(45)

Total financial investments, net of derivative liabilities

48,355

5,069

159

53,583

Percentage of total (%)

90%

10%

0%

100%

Unit-linked and variable annuity separate account





Equity securities and portfolio holdings in unit trusts

159,462

230

-

159,692

Debt securities

2,840

763

-

3,603

Other investments (including derivative assets)

-

-

-

-

Derivative liabilities

(11)

(6)

-

(17)

Total financial investments, net of derivative liabilities

162,291

987

-

163,278

Percentage of total (%)

99%

1%

0%

100%

Non-linked shareholder-backed





Loans

-

-

2,799

2,799

Equity securities and portfolio holdings in unit trusts

2,580

4

17

2,601

Debt securities

16,726

47,283

-

64,009

Other investments (including derivative assets)

42

988

962

1,992

Derivative liabilities

(7)

(513)

(455)

(975)

Total financial investments, net of derivative liabilities

19,341

47,762

3,323

70,426

Percentage of total (%)

27%

68%

5%

100%







Group total analysis, including other financial liabilities held

at fair value from continuing operations





Loans

-

-

2,799

2,799

Equity securities and portfolio holdings in unit trusts

181,360

2,140

170

183,670

Debt securities

48,530

51,139

6

99,675

Other investments (including derivative assets)

149

1,069

962

2,180

Derivative liabilities

(52)

(530)

(455)

(1,037)

Total financial investments, net of derivative liabilities

229,987

53,818

3,482

287,287

Investment contract liabilities without discretionary participation features held at fair value

-

(666)

-

(666)

Net asset value attributable to unit holders of consolidated unit trusts and similar funds

(3,482)

-

-

(3,482)

Other financial liabilities held at fair value

-

(5)

(3,081)

(3,086)

Total financial instruments at fair value

226,505

53,147

401

280,053

Percentage of total (%)

81%

19%

0%

100%

 



30 Jun 2018 £m


Level 1

Level 2

Level 3


Analysis of financial investments, net of derivative liabilities by business type

Quoted prices

(unadjusted)

 in active markets

Valuation

based on

significant

observable

market inputs

Valuation

based on

significant

unobservable

market inputs

Total

With-profits





Loans

-

-

1,848

1,848

Equity securities and portfolio holdings in unit trusts

59,025

4,748

490

64,263

Debt securities

29,680

45,952

355

75,987

Other investments (including derivative assets)

76

3,185

3,866

7,127

Derivative liabilities

(40)

(1,003)

-

(1,043)

Total financial investments, net of derivative liabilities

88,741

52,882

6,559

148,182

Percentage of total (%)

60%

36%

4%

100%

Unit-linked and variable annuity separate account





Equity securities and portfolio holdings in unit trusts

162,698

494

18

163,210

Debt securities

5,162

5,145

-

10,307

Other investments (including derivative assets)

3

4

7

14

Derivative liabilities

(9)

(4)

-

(13)

Total financial investments, net of derivative liabilities

167,854

5,639

25

173,518

Percentage of total (%)

97%

3%

0%

100%

Non-linked shareholder-backed





Loans

-

-

2,935

2,935

Equity securities and portfolio holdings in unit trusts

2,215

9

10

2,234

Debt securities

17,918

55,795

298

74,011

Other investments (including derivative assets)

34

1,403

909

2,346

Derivative liabilities

(1)

(1,692)

(400)

(2,093)

Total financial investments, net of derivative liabilities

20,166

55,515

3,752

79,433

Percentage of total (%)

25%

70%

5%

100%






Group total analysis, including other financial liabilities held

at fair value





Loans

-

-

4,783

4,783

Equity securities and portfolio holdings in unit trusts

223,938

5,251

518

229,707

Debt securities

52,760

106,892

653

160,305

Other investments (including derivative assets)

113

4,592

4,782

9,487

Derivative liabilities

(50)

(2,699)

(400)

(3,149)

Total financial investments, net of derivative liabilities

276,761

114,036

10,336

401,133

Investment contract liabilities without discretionary participation features held at fair value

-

(16,713)

-

(16,713)

Borrowings attributable to with-profits businesses

-

-

(1,746)

(1,746)

Net asset value attributable to unit holders of consolidated unit trusts and similar funds

(5,184)

(3,407)

(767)

(9,358)

Other financial liabilities held at fair value

-

-

(3,159)

(3,159)

Total financial instruments at fair value

271,577

93,916

4,664

370,157

Percentage of total (%)

74%

25%

1%

100%







Analysed as:





Total from continuing operations






With-profits

37,521

1,960

160

39,641


Unit-linked and variable annuity separate account

150,528

(253)

-

150,275


Non-linked shareholder-backed

15,956

38,070

403

54,429



204,005

39,777

563

244,345

Percentage of total continuing operations (%)

84%

16%

0%

100%







Total from discontinued UK and Europe operations*

67,572

54,139

4,101

125,812

Percentage of total discontinued operations (%)

54%

43%

3%

100%

* Classified as discontinued operations at 30 June 2019 (as described in note A2).

 



31 Dec 2018 £m


Level 1

Level 2

Level 3


Analysis of financial investments, net of derivative liabilities by business type

Quoted prices

(unadjusted)

 in active markets

Valuation

based on

significant

observable

market inputs

Valuation

based on

significant

unobservable

market inputs

Total

With-profits





Loans

-

-

1,703

1,703

Equity securities and portfolio holdings in unit trusts

52,320

5,447

488

58,255

Debt securities

31,210

48,981

811

81,002

Other investments (including derivative assets)

143

3,263

4,325

7,731

Derivative liabilities

(85)

(1,231)

-

(1,316)

Total financial investments, net of derivative liabilities

83,588

56,460

7,327

147,375

Percentage of total (%)

57%

38%

5%

100%

Unit-linked and variable annuity separate account





Equity securities and portfolio holdings in unit trusts

152,987

505

9

153,501

Debt securities

4,766

9,727

-

14,493

Other investments (including derivative assets)

6

3

6

15

Derivative liabilities

(2)

(3)

-

(5)

Total financial investments, net of derivative liabilities

157,757

10,232

15

168,004

Percentage of total (%)

94%

6%

0%

100%

Non-linked shareholder-backed





Loans

-

-

3,050

3,050

Equity securities and portfolio holdings in unit trusts

2,957

2

18

2,977

Debt securities

17,687

61,803

371

79,861

Other investments (including derivative assets)

61

1,258

941

2,260

Derivative liabilities

(2)

(1,760)

(423)

(2,185)

Total financial investments, net of derivative liabilities

20,703

61,303

3,957

85,963

Percentage of total (%)

24%

71%

5%

100%






Group total analysis, including other financial liabilities held

at fair value





Loans

-

-

4,753

4,753

Equity securities and portfolio holdings in unit trusts

208,264

5,954

515

214,733

Debt securities

53,663

120,511

1,182

175,356

Other investments (including derivative assets)

210

4,524

5,272

10,006

Derivative liabilities

(89)

(2,994)

(423)

(3,506)

Total financial investments, net of derivative liabilities

262,048

127,995

11,299

401,342

Investment contract liabilities without discretionary participation features held at fair value

-

(16,054)

-

(16,054)

Borrowings attributable to with-profits businesses

-

-

(1,606)

(1,606)

Net asset value attributable to unit holders of consolidated unit trusts and similar funds

(6,852)

(3,811)

(988)

(11,651)

Other financial liabilities held at fair value

-

(2)

(3,404)

(3,406)

Total financial instruments at fair value

255,196

108,128

5,301

368,625

Percentage of total (%)

70%

29%

1%

100%







Analysed as:





Total from continuing operations






With-profits

39,191

3,928

159

43,278


Unit-linked and variable annuity separate account

143,556

(64)

-

143,492


Non-linked shareholder-backed

16,549

43,948

266

60,763



199,296

47,812

425

247,533

Percentage of total continuing operations (%)

81%

19%

0%

100%







Total from discontinued UK and Europe operations*

55,900

60,316

4,876

121,092

Percentage of total discontinued operations (%)

46%

50%

4%

100%

* Classified as discontinued operations at 30 June 2019 (as described in note A2).

 

Assets and liabilities at amortised cost and their fair value 

The table below shows the financial assets and liabilities carried at amortised cost on the statement of financial position and their fair value, excluding those held for distribution. Cash deposits, accrued income, other debtors, accruals, deferred income and other liabilities are excluded from the analysis below, as these are carried at amortised cost, which approximates fair value.

 


2019 £m



2018 £m



30 Jun


30 Jun


31 Dec


Carrying

 value

Fair

value


Carrying

 value

Fair

value


Carrying

 value

Fair

value

Assets









Loans

9,714

10,010


12,139

12,710


13,257

13,666

Liabilities









Investment contract liabilities without discretionary participation features

(3,132)

(3,140)


(3,001)

(3,003)


(3,168)

(3,157)

Core structural borrowings of shareholder-financed businesses

(7,441)

(8,052)


(6,367)

(6,518)


(7,664)

(7,847)

Operational borrowings (excluding lease liabilities) attributable to shareholder-financed businesses

(1,435)

(1,435)


(1,618)

(1,618)


(998)

(998)

Borrowings (excluding lease liabilities) attributable to the with-profits funds

(25)

(24)


(1,843)

(1,768)


(2,334)

(2,103)

Obligations under funding, securities lending and sale and repurchase agreements

(6,756)

(6,890)


(7,128)

(7,126)


(6,989)

(7,008)

Total financial instruments carried at amortised cost

(9,075)

(9,531)


(7,818)

(7,323)


(7,896)

(7,447)










Analysed as:









Total from continuing operations




(7,921)

(7,989)


(7,848)

(8,040)

Total from discontinued UK and Europe operations*




103

666


(48)

593





(7,818)

(7,323)


(7,896)

(7,447)

* Classified as discontinued operations at 30 June 2019 (as described in note A2).

 

(c)   Valuation approach for level 2 fair valued assets and liabilities

A significant proportion of the Group's level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line with market practice, are generally valued using a designated independent pricing service or quote from third-party brokers. These valuations are subject to a number of monitoring controls, such as comparison to multiple pricing sources where available, monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades. For further detail on the valuation approach for level 2 fair valued assets and liabilities please refer to note C3.1 of the Group IFRS financial statements for the year ended 31 December 2018.

 

(d)   Fair value measurements for level 3 fair valued assets and liabilities

Reconciliation of movements in level 3 assets and liabilities measured at fair value

The following table reconciles the value of level 3 fair valued assets and liabilities at 1 January 2019 to that presented at 30 June 2019.

     

Total investment return recorded in the income statement represents interest and dividend income, realised gains and losses, unrealised gains and losses on the assets classified at fair value through profit and loss and foreign exchange movements on an individual entity's overseas investments. 

 

Total gains and losses recorded in other comprehensive income includes unrealised gains and losses on debt securities held as available-for-sale within Jackson and foreign exchange movements arising from the retranslation of the Group's overseas subsidiaries and branches. 

 



Half year 2019 £m

Reconciliation of movements in level 3 assets and liabilities measured at fair value

Loans

Equity

securities

and

portfolio

holdings in

unit trusts

Debt

securities

Other

investments

(including

derivative

assets)

Derivative

liabilities

Borrowings

attributable

 to with

-profits

businesses

Net asset

value

attributable

to unit

holders of

consolidated

unit trusts

and

similar funds

Other

financial

liabilities

Total

At 1 January 2019

4,753

515

1,182

5,272

(423)

(1,606)

(988)

(3,404)

5,301

Reclassification to held for distribution

(1,970)

(345)

(1,177)

(4,333)

-

1,606

988

355

(4,876)

Total gains (losses) in income statement:











Net realised gains (losses)

91

-

5

(25)

-

-

-

(94)

(23)


Net unrealised gains (losses) on financial instruments held at the end of period

-

(2)

-

40

(15)

-

-

(14)

9

Total gains (losses) recorded in other comprehensive income

4

-

1

(5)

(17)

-

-

(11)

(28)

Purchases

-

2

-

127

-

-

-

-

129

Sales

-

-

(5)

(114)

-

-

-

-

(119)

Issues

26

-

-

-

-

-

-

(35)

(9)

Settlements

(105)

-

-

-

-

-

-

122

17

At 30 June 2019

2,799

170

6

962

(455)

-

-

(3,081)

401

 



Half year 2018 £m

Reconciliation of movements in level 3 assets and liabilities measured at fair value

Loans

Equity

securities

and

portfolio

 holdings in

 unit trusts

Debt

securities

Other

investments

(including

derivative

 assets)

Derivative

liabilities

Borrowings

attributable

to with-

profits

businesses

Net asset

 value

 attributable

 to unit

 holders of

consolidated

 unit trusts

 and

 similar funds

Other

financial

liabilities

Total

At 1 January 2018

4,837

371

654

4,424

(512)

(1,887)

(413)

(3,031)

4,443

Total gains (losses) in income statement:











Net realised gains (losses)

82

-

-

79

-

-

-

(82)

79


Net unrealised gains (losses) on financial instruments held at the end of period

(23)

43

(10)

109

57

(2)

38

(2)

210

Total gains (losses) recorded in other comprehensive income

65

(7)

-

46

-

-

-

(68)

36

Purchases

2

112

55

550

-

-

-

-

719

Sales

-

(1)

(46)

(426)

-

-

-

-

(473)

Issues

43

-

-

-

-

-

(414)

(79)

(450)

Settlements

(223)

-

-

-

-

143

22*

103

45

Transfers out of level 3

-

-

-

-

55

-

-

-

55

At 30 June 2018

4,783

518

653

4,782

(400)

(1,746)

(767)

(3,159)

4,664

 






Full year 2018 £m




Reconciliation of movements in level 3 assets and liabilities measured at fair value

Loans

Equity

securities

and

portfolio

 holdings in

 unit trusts

Debt

securities

Other

investments

(including

derivative

 assets)

Derivative

liabilities

Borrowings

 attributable

 to with-

profits

businesses

Net asset

value

attributable

to unit

holders of

consolidated

unit trusts

and

similar funds

Other

financial

liabilities

Total

At 1 January 2018

4,837

371

654

4,424

(512)

(1,887)

(413)

(3,031)

4,443

Total gains (losses) in income statement:











Net realised gains (losses)

(7)

-

9

35

-

-

-

(1)

36


Net unrealised gains (losses) on financial instruments held at the end of the year

(71)

38

(16)

370

27

(23)

67

6

398

Total gains (losses) recorded in other comprehensive income

162

8

-

54

(1)

-

31

(170)

84

Purchases

62

125

666

1,202

-

-

-

-

2,055

Sales

(178)

(35)

(131)

(813)

-

-

-

-

(1,157)

Issues

279

-

-

-

-

-

(697)

(481)

(899)

Settlements

(331)

-

-

-

-

304

57

273

303

Transfers into level 3

-

8

-

-

-

-

-

-

8

Transfers out of level 3

-

-

-

-

63

-

(33)

-

30

At 31 December 2018

4,753

515

1,182

5,272

(423)

(1,606)

(988)

(3,404)

5,301

* Includes distributions to third-party investors by subsidiaries held by the UK with-profits funds for investment purposes. These distributions vary period to period depending on the maturity of the subsidiaries and the gains realised by those entities in the period.

 

Valuation approach for level 3 fair valued assets and liabilities

Investments valued using valuation techniques include financial investments which by their nature do not have an externally quoted price based on regular trades, and financial investments for which markets are no longer active as a result of market conditions, eg market illiquidity. The valuation techniques used include comparison to recent arm's length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option-adjusted spread models and, if applicable, enterprise valuation. For further detail on the valuation approach for level 3 fair valued assets and liabilities, please refer to note C3.1 of the Group's consolidated financial statements for the year ended 31 December 2018.

 

The Group's valuation policies, procedures and analyses for instruments categorised as level 3 are overseen by Business Unit committees as part of the Group's wider financial reporting governance processes. The procedures undertaken include approval of valuation methodologies, verification processes, and resolution of significant or complex valuation issues. In undertaking these activities the Group makes use of the extensive expertise of its asset management functions. In addition, the Group has minimum standards for independent price verification to ensure valuation accuracy is regularly independently verified. Adherence to this policy is monitored across the business units.

 

At 30 June 2019, the Group held £401 million of net financial instruments at fair value within level 3. This represents less than 0.5 per cent of the total fair valued financial assets net of financial liabilities of the continuing operations.

 

Included within these net assets and liabilities are policy loans of £2,799 million at 30 June 2019 measured as the loan outstanding balance, plus accrued investment income, attached to acquired REALIC business and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of £2,953 million at 30 June 2019 is also classified within level 3. The fair value of the liabilities is equal to the fair value of the underlying assets held as collateral, which primarily consist of policy loans and debt securities. The assets and liabilities broadly offset and therefore their movements have minimal impact on shareholders' profit and equity.

 

Excluding the loans and funds withheld liability under REALIC's reinsurance arrangements as described above, which amounted to a net liability of £154 million, the level 3 fair valued financial assets net of financial liabilities were a net asset of £555 million, which are all externally valued and comprise the following:

-      Other financial investments of £1,006 million consisting primarily of private equity limited partnerships held by Jackson, which are externally valued in accordance with International Private Equity and Venture Capital Association guidelines using management information available for these investments; and 

-      Offset by net derivative liabilities of £451 million, which are valued externally using the discounted cash flow method in line with standard market practices but are subject to a further independent assessment against external counterparties' valuations.

Of the net asset of £555 million referred to above:

-      A net asset of £159 million is held by the Group's Asia participating funds and therefore shareholders' profit and equity are not impacted by movements in the valuation of these financial instruments; and

-      A net asset of £396 million is held to support non-linked shareholder-backed business. All of these instruments are externally valued and are therefore inherently less subjective than internal valuations. If the value of all these Level 3 financial instruments decreased by 10 per cent, the change in valuation would be £40 million, which would reduce shareholders' equity by this amount before tax. All of this amount would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of adjusted IFRS operating profit based on longer-term investment returns.

 

(e)   Transfers into and transfers out of levels 

The Group's policy is to recognise transfers into and transfers out of levels as of the end of each half year reporting period except for material transfers which are recognised as of the date of the event or change in circumstances that caused the transfer. Transfers are deemed to have occurred when there is a material change in the observed valuation inputs or a change in the level of trading activities of the securities.

 

During half year 2019, the transfers between levels within the Group's portfolio, excluding those held by the Group's discontinued UK and Europe operations, were primarily transfers from level 1 to level 2 of £131 million and transfers from level 2 to level 1 of £618 million. These transfers which relate to equity securities and debt securities arose to reflect the change in the observed valuation inputs and in certain cases, the change in the level of trading activities of the securities. There were no transfers into and out of level 3 in the period.

 

C3.2  Debt securities

 

This note provides analysis of the Group's debt securities, including asset-backed securities and sovereign debt securities.

 

With the exception of certain debt securities for US insurance operations classified as 'available-for-sale' under IAS 39 as disclosed in notes C3.2 (b) to (d) below, the Group's debt securities are carried at fair value through profit or loss.

 

The analysis of the Group's debt securities at 30 June 2019 below excludes those of the Group's UK and Europe operations which are classified as held for distribution. In line with IFRS requirements, the comparatives have not been re-presented for the assets and liabilities classified for held for distribution in the current period. An analysis of the credit ratings of the debt securities held by the UK and Europe operations at 30 June 2019 is provided in note D2.2.

 

(a)   Credit rating

Debt securities are analysed below according to external credit ratings issued, with equivalent ratings issued by different ratings agencies grouped together. Standard & Poor's ratings have been used where available, if this isn't the case Moody's and then Fitch have been used as alternatives. For the US, NAIC ratings have also been used where relevant (as shown in 'Other' in the tables below). In the table below, AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB- ratings. Financial assets which fall outside this range are classified as below BBB-.

 



30 Jun 2019 £m








Other




AAA 

AA+ to AA-

A+ to A-

BBB+

 to BBB-

Below BBB- 

(including

NAIC rated)

Total 

Asia









With-profits

3,131

14,977

4,688

4,621

2,016

2,630

32,063


Unit-linked

405

196

458

1,502

378

664

3,603


Non-linked shareholder-backed

1,072

4,155

4,458

3,287

2,493

1,371

16,836


Asset management

12

-

37

-

-

-

49

US









Non-linked shareholder-backed

1,189

7,984

11,527

15,068

1,579

7,917

45,264

Other operations

510

1,144

129

20

50

7

1,860

Total debt securities

6,319

28,456

21,297

24,498

6,516

12,589

99,675

 



30 Jun 2018 £m








Other




AAA 

AA+ to AA-

A+ to A-

BBB+

 to BBB-

Below BBB- 

(including

NAIC rated)

Total 

Asia









With-profits

2,496

11,425

3,983

3,351

1,768

1,900

24,923


Unit-linked

726

147

489

1,326

441

642

3,771


Non-linked shareholder-backed

948

3,138

3,234

3,063

2,040

1,099

13,522


Asset management

12

-

28

-

-

-

40

US









Non-linked shareholder-backed

442

6,338

9,439

13,148

1,035

5,713

36,115

Other operations

673

1,237

177

39

45

19

2,190

Total continuing operations

5,297

22,285

17,350

20,927

5,329

9,373

80,561

Total discontinued UK and Europe operations*

10,722

17,118

18,438

16,488

3,788

13,190

79,744

Total debt securities

16,019

39,403

35,788

37,415

9,117

22,563

160,305

 



31 Dec 2018 £m








Other




AAA 

AA+ to AA-

A+ to A-

BBB+

to BBB-

Below BBB- 

(including

NAIC rated)

Total 

Asia









With-profits

2,873

12,379

4,142

3,760

1,747

2,303

27,204


Unit-linked

817

100

492

1,431

426

715

3,981


Non-linked shareholder-backed

1,034

3,552

3,717

2,934

2,202

1,144

14,583


Asset management

11

-

60

-

-

-

71

US









Non-linked shareholder-backed

678

7,383

10,286

14,657

1,429

7,161

41,594

Other operations

619

1,089

151

41

49

18

1,967

Total continuing operations

6,032

24,503

18,848

22,823

5,853

11,341

89,400

Total discontinued UK and Europe operations*

10,938

18,204

18,645

19,728

3,444

14,997

85,956

Total debt securities

16,970

42,707

37,493

42,551

9,297

26,338

175,356

* Classified as discontinued operations at 30 June 2019 (as described in note A2).

 

Securities for continuing operations with credit ratings classified as 'Other' can be further analysed as follows. Refer to note D2.2 for details on securities with ratings classified as 'Other' for discontinued operations.

 





2019 £m


2018 £m

Asia



30 Jun


30 Jun

31 Dec

Government bonds



37


23

36

Corporate bonds - rated as investment grade by local external ratings agencies

1,215


1,006

978

Other



119


70

130

Total Asia non-linked shareholder-backed other debt securities



1,371


1,099

1,144











2019 £m


2018 £m

US

Mortgage

-backed

securities

Other

securities

30 Jun


30 Jun

31 Dec

Implicit ratings of other US debt securities based on NAIC* valuations (see below)








NAIC 1

2,184

3,337

5,521


3,903

5,006


NAIC 2

-

2,357

2,357


1,781

2,118


NAIC 3-6

3

36

39


29

37

Total US other debt securities

2,187

5,730

7,917


5,713

7,161

* The Securities Valuation Office of the NAIC classifies debt securities into six quality categories ranging from Class 1 (the highest) to Class 6 (the lowest). Performing securities are designated as Classes 1 to 5 and securities in or near default are designated Class 6.

†   Mortgage-backed securities totalling £2,003 million at 30 June 2019 have credit ratings issued by Standard & Poor's of BBB- or above and hence are designated as investment grade. Other securities totalling £5,694 million at 30 June 2019 with NAIC ratings 1 or 2 are also designated as investment grade.

 

The credit ratings, information or data contained in this report which are attributed and specifically provided by S&P, Moody's and Fitch Solutions and their respective affiliates and suppliers ('Content Providers') is referred to here as the 'Content'. Reproduction of any Content in any form is prohibited except with the prior written permission of the relevant party. The Content Providers do not guarantee the accuracy, adequacy, completeness, timeliness or availability of any Content and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such Content. The Content Providers expressly disclaim liability for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of the Content. A reference to a particular investment or security, a rating or any observation concerning an investment that is part of the Content is not a recommendation to buy, sell or hold any such investment or security, nor does it address the suitability an investment or security and should not be relied on as investment advice.

 

(b)   Additional analysis of US insurance operations debt securities

 



2019 £m 


2018 £m 



30 Jun


30 Jun

31 Dec

Corporate and government security and commercial loans:






Government

6,094


4,737

5,465


Publicly traded and SEC Rule 144A securities*

27,419


23,346

26,196


Non-SEC Rule 144A securities

7,293


4,659

6,329

Asset backed securities (see note (e))

4,458


3,373

3,604

Total US debt securities

45,264


36,115

41,594

* A 1990 SEC rule that facilitates the resale of privately placed securities under Rule 144A that are without SEC registration to qualified institutional investors. The rule was designed to develop a more liquid and efficient institutional resale market for unregistered securities.

†  Debt securities for US operations included in the statement of financial position comprise:

 



2019 £m 


2018 £m 



30 Jun


30 Jun

31 Dec

Available-for-sale

44,178


35,860

40,849

Fair value through profit and loss

1,086


255

745



45,264


36,115

41,594

 

Realised gains and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report.

 

(c)    Movements in unrealised gains and losses on Jackson available-for-sale securities

The movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised loss of £414 million to a net unrealised gain of £2,247 million as analysed in the table below.

 



30 Jun 2019 £m

Foreign 

 exchange 

 translation

Changes in 

unrealised 

 appreciation

31 Dec 2018 £m




Reflected as part of movement in other comprehensive income


Assets fair valued at below book value






Book value*

2,339



25,330


Unrealised gain (loss)

(49)

14

862

(925)


Fair value (as included in statement of financial position)

2,290



24,405

Assets fair valued at or above book value






Book value*

39,592



15,933


Unrealised gain (loss)

2,296

30

1,755

511


Fair value (as included in statement of financial position)

41,888



16,444

Total






Book value*

41,931



41,263


Net unrealised gain (loss)

2,247

44

2,617

(414)


Fair value (as included in the footnote above in the overview table and the statement of financial position)

44,178



40,849

*  Book value represents cost/amortised cost of the debt securities.

  Translated at the average rate of US$1.2939: £1.00.

 

(d)   US debt securities classified as available-for-sale in an unrealised loss position

(i)    Fair value of securities as a percentage of book value

The following table shows the fair value of the debt securities in a gross unrealised loss position for various percentages of book value:

 




30 Jun 2019 £m


30 Jun 2018 £m


31 Dec 2018 £m




Fair

value

Unrealised

loss


Fair

value

Unrealised

loss


Fair

value

Unrealised

loss


Between 90% and 100%

2,221

(32)


22,187

(729)


23,662

(809)


Between 80% and 90%

38

(5)


195

(29)


707

(104)


Below 80%

31

(12)


15

(4)


36

(12)


Total

2,290

(49)


22,397

(762)


24,405

(925)

 

(ii)   Unrealised losses by maturity of security

 



2019 £m 


2018 £m 



30 Jun


30 Jun

31 Dec

1 year to 5 years

(2)


(65)

(72)

5 years to 10 years

(10)


(348)

(436)

More than 10 years

(19)


(297)

(372)

Mortgage-backed and other debt securities

(18)


(52)

(45)

Total

(49)


(762)

(925)

 

(iii)  Age analysis of unrealised losses for the periods indicated

The following table shows the age analysis of all the unrealised losses in the portfolio by reference to the length of time the securities have been in an unrealised loss position:

 














30 Jun 2019 £m



30 Jun 2018 £m


31 Dec 2018 £m

Age analysis

Non-

investment

grade

Investment

grade*

Total


Non-

investment

grade

Investment

grade*

Total


Non-

investment

grade

Investment

grade*

Total

Less than 6 months

(1)

(4)

(5)


(14)

(418)

(432)


(20)

(141)

(161)

6 months to 1 year

(1)

(13)

(14)


(7)

(148)

(155)


(22)

(440)

(462)

1 year to 2 years

(1)

(9)

(10)


(1)

(148)

(149)


(10)

(142)

(152)

2 years to 3 years

-

(10)

(10)


-

(1)

(1)


-

(123)

(123)

More than 3 years

-

(10)

(10)


(1)

(24)

(25)


(2)

(25)

(27)


(3)

(46)

(49)


(23)

(739)

(762)


(54)

(871)

(925)

* For Standard and Poor, Moody's and Fitch rated debt securities, those with ratings range from AAA to BBB- are designated as investment grade. For NAIC rated debt securities, those with ratings 1 or 2 are designated as investment grade.

 

Further, the following table shows the age analysis of the securities whose fair values were below 80 per cent of the book value:

 











30 Jun 2019 £m


30 Jun 2018 £m


31 Dec 2018 £m

Age analysis

Fair

value

Unrealised

loss


Fair

value

Unrealised

loss


Fair

value

Unrealised

loss

Less than 3 months

26

(10)


13

(3)


32

(10)

3 months to 6 months

5

(2)


-

-


2

(1)

More than 6 months

-

-


2

(1)


2

(1)


31

(12)


15

(4)


36

(12)

 

(e)   Asset-backed securities

The Group's holdings in asset-backed securities (ABS), which comprise residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralised debt obligations (CDO) funds and other asset-backed securities, at 30 June 2019 are as follows:

 



2019 £m 


2018 £m 



30 Jun


30 Jun

31 Dec

Asia operations:note (i)






Shareholder-backed business

126


97

121


With-profits business

256


192

235

US operationsnote (ii)

4,458


3,373

3,604

Other operationsnote (iii)

315


507

445

Total for continuing operations

5,155


4,169

4,405

Total for discontinued UK and Europe operations*



6,374

6,676

Group total



10,543

11,081

* Classified as discontinued operations at 30 June 2019 (as described in note A2).

 

Notes

(i)     The Asia operations' exposure to asset-backed securities for the shareholder-backed business and with-profits business at 30 June 2019, is 100 per cent (30 June 2018: 100 per cent; 31 December 2018: 99.8 per cent) investment grade.

(ii)    US operations' exposure to asset-backed securities comprises:

 



2019 £m 


2018 £m



30 Jun


30 Jun

31 Dec

RMBS






Sub-prime (30 Jun 2019: 2% AAA, 5% AA, 2% A)

88


105

96


Alt-A (30 Jun 2019: 17% AAA, 34% A)

101


117

105


Prime including agency (2019: 39% AAA, 45% AA, 7% A)

579


425

441

CMBS (30 Jun 2019: 78% AAA, 16% AA, 3% A)

2,266


1,638

1,945

CDO funds (30 Jun 2019: 37% AAA, 33% AA, 30% A), including £nil exposure to sub-prime

353


11

13

Other ABS (30 Jun 2019: 15% AAA, 16% AA, 52% A), including £59 million exposure to sub-prime

1,071


1,077

1,004

Total (30 Jun 2019: 52% AAA, 21% AA, 18% A)

4,458


3,373

3,604

 

(iii)   Other operations' exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the £315 million held at 30 June 2019, 100 per cent (30 June 2018: 99 per cent; 31 December 2018: 99 per cent) are graded AAA.

 

(f)    Group sovereign debt and bank debt exposure

The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities at 30 June 2019 are analysed as follows:

 

Exposure to sovereign debts

 


30 Jun 2019 £m


30 Jun 2018 £m


31 Dec 2018 £m


Shareholder-backed

 business

With-

profits

funds


Shareholder-backed

 business

With-

profits

funds


Shareholder-backed

 business

With-

profits

funds

Total Eurozone

-

-


799

429


378

440

United Kingdom

988

-


3,482

3,130


3,226

3,013

United States*

6,410

12,925


5,243

10,519


5,647

11,858

Indonesia

295

-


262

-


282

-

Singapore

132

1,719


128

1,278


164

1,658

Thailand

1,106

-


965

-


921

-

Vietnam

1,186

-


1,794

-


1,871

-

Other Asia

1,925

944


1,651

730


1,779

866

Other

98

25


123

306


125

221

Total

12,140

15,613


14,447

16,392


14,393

18,056










Analysed as:









Total from continuing operations




11,180

11,824


11,658

13,144

Total from discontinued UK and Europe operations




3,267

4,568


2,735

4,912





14,447

16,392


14,393

18,056

* The exposure to the United States sovereign debt comprises holdings of the US and Asia insurance operations.

 Classified as discontinued operations at 30 June 2019 (as described in note A2).

 

Exposure to bank debt securities

 




30 Jun 2019 £m


2018 £m




Senior debt


Subordinated debt




30 Jun

31 Dec

Shareholder-backed business



Total


Tier 1

Tier 2

Total


Group

total


Group total

Group total

Italy



-


-

-

-


-


-

-

Spain



70


-

-

-


70


78

106

France



142


-

9

9


151


81

156

Germany



30


-

12

12


42


119

125

Netherlands



56


-

3

3


59


51

73

Other Eurozone



-


-

-

-


-


15

17

Total Eurozone



298


-

24

24


322


344

477

United Kingdom



598


8

95

103


701


1,289

1,346

United States



2,354


1

31

32


2,386


2,495

2,667

Asia



248


114

312

426


674


572

592

Other



470


-

75

75


545


639

645

Total



3,968


123

537

660


4,628


5,339

5,727














Analysed as:













Total from continuing operations











4,172

4,640

Total from discontinued UK and Europe operations*











1,167

1,087












5,339

5,727














With-profits funds 













Italy



-


-

-

-


-


38

38

Spain



2


-

-

-


2


21

17

France



7


-

27

27


34


318

352

Germany



-


-

47

47


47


207

229

Netherlands



8


-

10

10


18


227

266

Other Eurozone



-


-

-

-


-


27

74

Total Eurozone



17


-

84

84


101


838

976

United Kingdom



31


2

82

84


115


2,032

2,194

United States



16


1

3

4


20


2,533

2,730

Asia



279


363

299

662


941


906

1,015

Other



59


-

142

142


201


1,882

1,810

Total



402


366

610

976


1,378


8,191

8,725














Analysed as:













Total from continuing operations











1,264

1,287

Total from discontinued UK and Europe operations*











6,927

7,438












8,191

8,725

* Classified as discontinued operations at 30 June 2019 (as described in note A2).

 

The tables above exclude assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition, the tables above exclude the proportionate share of sovereign debt holdings of the Group's joint venture operations.

 

C3.3  Loans portfolio

 

(a)   Overview of loans portfolio

Loans are principally accounted for at amortised cost, net of impairment except for certain policy loans of the US insurance operations that are held to back liabilities for funds withheld under reinsurance arrangements and are also accounted on a fair value basis.

 

The analysis of the Group's loan portfolio at 30 June 2019 below excludes those of the Group's UK and Europe operations which are classified as held for distribution. An analysis of the loan portfolio held by the UK and Europe operations at 30 June 2019 is provided in note D2.2. In line with IFRS requirements, the comparatives have not been re-presented for the assets and liabilities classified for held for distribution in the current period.

 

The amounts included in the statement of financial position are analysed as follows:

 



30 Jun 2019 £m 



30 Jun 2018 £m



31 Dec 2018 £m 



Mortgage loans

Policy loans

Other

loans

Total


Mortgage loans

Policy loans

Other loans

Total


Mortgage loans

Policy loans

Other

loans

Total



note (i)

note (ii)




note (i)

note (ii)




note (i)

note (ii)



Asia
















With-profits

-

783

63

846


-

652

105

757


-

727

65

792


Non-linked shareholder-backed

140

233

15

388


170

217

193

580


156

226

203

585

US
















Non-linked shareholder-backed

7,587

3,686

-

11,273


6,292

3,523

-

9,815


7,385

3,681

-

11,066

Other operations

-

-

6

6


-

-

106

106


-

-

-

-

Total continuing operations

7,727

4,702

84

12,513


6,462

4,392

404

11,258


7,541

4,634

268

12,443

Total discontinued UK and Europe operationsnote (iii)






3,953

4

1,707

5,664


4,116

3

1,448

5,567

Total loans securities






10,415

4,396

2,111

16,922


11,657

4,637

1,716

18,010

 

Notes

(i)       All mortgage loans are secured by properties.

(ii)      In the US, £2,799 million of policy loans held at 30 June 2019 (30 June 2018: £2,638 million; 31 December 2018: £2,783 million) are backing liabilities for funds withheld under reinsurance arrangements and are accounted for at fair value through profit or loss. All other policy loans are accounted for at amortised cost, less any impairment.

(iii)   The amounts held by the UK and Europe operations were transferred to assets held for distribution at 30 June 2019 (see note D2.2).

 

(b)   Additional information on US mortgage loans

In the US, mortgage loans are all commercial mortgage loans that are secured by the following property types: industrial, multi-family residential, suburban office, retail or hotel. The average loan size is £14.7 million (30 June 2018: £13.3 million; 31 December 2018: £14.0 million). The portfolio has a current estimated average loan to value of 53 per cent (30 June 2018: 55 per cent; 31 December 2018: 53 per cent).

 

Jackson had no mortgage loans where the contractual terms of the agreements had been restructured for all periods shown.

 

C4  Policyholder liabilities and unallocated surplus

The note provides information of policyholder liabilities and unallocated surplus of with-profits funds held on the Group's statement of financial position.

 

The analysis below excludes the movement for UK and Europe operations which are classified as held for distribution as at 30 June 2019. The balances of the discontinued UK and Europe operations are removed from the opening balance. An analysis of the movement in policyholder liabilities and unallocated surplus of with-profits funds held by the UK and Europe operations at 30 June 2019 is provided in note D2.2.

C4.1  Group overview

(i)    Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds

 



Half year 2019 £m



Asia

US

UK and

Europe

Total


note C4.2

note C4.3

note D2.2


At 1 January 2019

82,763

185,600

164,889

433,252

Comprising:






- Policyholder liabilities on the consolidated statement of financial position






(excludes £39 million classified as unallocated to a segment)note (a)

72,107

185,600

151,555

409,262


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

2,511

-

13,334

15,845


- Group's share of policyholder liabilities of joint ventures and associatenote(b)

8,145

-

-

8,145







Reclassification of UK and Europe liabilities as held for distribution

-

-

(164,889)

(164,889)

Net flows:






Premiums

7,574

7,060

-

14,634


Surrenders

(1,531)

(6,398)

-

(7,929)


Maturities/deaths

(989)

(1,348)

-

(2,337)

Net flows

5,054

(686)

-

4,368

Shareholders' transfers post tax

(38)

-

-

(38)

Investment-related items and other movements

6,142

16,838

-

22,980

Foreign exchange translation differences

676

400

-

1,076

At 30 June 2019

94,597

202,152

-

296,749

Comprising:






- Policyholder liabilities on the consolidated statement of financial position

82,969

202,152

-

285,121


(excludes £47 million classified as unallocated to a segment)note (a)






- Unallocated surplus of with-profits funds on the consolidated statement of financial position

2,944

-

-

2,944


- Group's share of policyholder liabilities of joint ventures and associatenote (b)

8,684

-

-

8,684









Half year 2018 £m



Asia

US

UK and

Europe

Total


note C4.2

note C4.3

note D2.2


At 1 January 2018

73,839

180,724

181,066

435,629

Comprising:






- Policyholder liabilities on the consolidated statement of financial position






(excludes £32 million classified as unallocated to a segment)

62,898

180,724

167,589

411,211


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

3,474

-

13,477

16,951


- Group's share of policyholder liabilities of joint ventures and associatenote (b)

7,467

-

-

7,467






Reclassification of reinsured UK annuity contracts as held for sale

-

-

(12,002)

(12,002)

Net flows:






Premiums

6,247

7,111

6,964

20,322


Surrenders

(1,547)

(5,953)

(3,446)

(10,946)


Maturities/deaths

(838)

(1,076)

(3,499)

(5,413)

Net flows

3,862

82

19

3,963

Shareholders' transfers post tax

(27)

-

(127)

(154)

Investment-related items and other movements

(1,349)

(103)

(801)

(2,253)

Foreign exchange translation differences

690

4,447

17

5,154

At 30 June 2018

77,015

185,150

168,172

430,337

Comprising:






- Policyholder liabilities on the consolidated statement of financial position

65,640

185,150

154,655

405,445


(excludes £37 million classified as unallocated to a segment)note (a)






- Unallocated surplus of with-profits funds on the consolidated statement of financial position

3,766

-

13,517

17,283


- Group's share of policyholder liabilities of joint ventures and associatenote (b)

7,609

-

-

7,609

Average policyholder liability balancesnote (c)






Half year 2019

85,953

193,876

-

279,829


Half year 2018

71,807

182,937

161,122

415,866

 

Notes

(a)   The policyholder liabilities of the Asia insurance operations at 30 June 2019 of £82,969 million (30 June 2018: £65,640 million; 31 December 2018: £72,107 million) are after deducting the intra-group reinsurance liabilities ceded by the UK and Europe insurance operations of £1,108 million (30 June 2018: £1,181 million; 31 December 2018: £1,109 million) to the Hong Kong with-profits business. Including this amount, total Asia policyholder liabilities are £84,077 million (30 June 2018: £66,821 million; 31 December 2018: £73,216 million).

(b)   The Group's investment in joint ventures and associate are accounted for on an equity method basis in the Group's statement of financial position. The Group's share of the policyholder liabilities as shown above relates to life businesses in China, India and of the Takaful business in Malaysia.

(c)   Averages have been based on opening and closing balances, adjusted for acquisitions, disposals and corporate transactions arising in the period, and exclude unallocated surplus of with-profits funds.

 

The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary participation features (as defined in IFRS 4) and their full movement in the period but exclude liabilities that have not been allocated to a reporting segment. The items above are shown gross of external reinsurance.

 

The analysis includes the impact of premiums, claims and investment movements on policyholders' liabilities. The impact does not represent premiums, claims and investment movements as reported in the income statement. For example, the premiums shown above will exclude any deductions for fees/charges. Claims (surrenders, maturities and deaths) represent the policyholder liabilities provision released rather than the claim amount paid to the policyholder.

 

(ii)   Analysis of movements in policyholder liabilities for shareholder-backed business

 


Half year 2019 £m


Asia

US

UK and

Europe

Total

At 1 January 2019

40,597

185,600

40,760

266,957

Reclassification of UK and Europe liabilities as held for distribution

-

-

(40,760)

(40,760)

Net flows:





   Premiums

3,923

7,060

-

10,983

   Surrenders

(1,324)

(6,398)

-

(7,722)

   Maturities/deaths

(439)

(1,348)

-

(1,787)

Net flowsnote

2,160

(686)

-

1,474

Investment-related items and other movements

1,623

16,838

-

18,461

Foreign exchange translation differences

340

400

-

740

At 30 June 2019

44,720

202,152

-

246,872






Comprising:





  - Policyholder liabilities on the consolidated statement of financial position

36,036

202,152

-

238,188

(excludes £47 million classified as unallocated to a segment)





  - Group's share of policyholder liabilities relating to joint ventures and associate

8,684

-

-

8,684







Half year 2018 £m


Asia

US

UK and

Europe

Total

At 1 January 2018

37,402

180,724

56,367

274,493

Reclassification of reinsured UK annuity contracts as held for sale

-

-

(12,002)

(12,002)

Net flows:





   Premiums

3,266

7,111

681

11,058

   Surrenders

(1,383)

(5,953)

(1,200)

(8,536)

   Maturities/deaths

(420)

(1,076)

(1,294)

(2,790)

Net flowsnote

1,463

82

(1,813)

(268)

Investment-related items and other movements

(718)

(103)

(236)

(1,057)

Foreign exchange translation differences

1

4,447

-

4,448

At 30 June 2018

38,148

185,150

42,316

265,614






Comprising:





  - Policyholder liabilities on the consolidated statement of financial position

30,539

185,150

42,316

258,005

(excludes £37 million classified as unallocated to a segment)





  - Group's share of policyholder liabilities relating to joint ventures and associate

7,609

-

-

7,609

 

Note

Including net flows of the Group's insurance joint ventures and associate.

 

(iii)  Movement in insurance contract liabilities and unallocated surplus of with-profits funds

Further analysis of the movement in the period of the Group's gross contract liabilities, reinsurer's share of insurance contract liabilities and unallocated surplus of with-profits funds (excluding those held by joint ventures and associate) is provided below:

 


Contract liabilities

Reinsurer's share of insurance contract liabilities

Unallocated

surplus of

with-profits funds


£m

£m

£m

At 1 January 2019

409,301

(11,144)

15,845

Removal of opening balances relating to the discontinued UK and Europe insurance operationsnote (a)

(151,555)

1,703

(13,334)

Income and expense included in the income statement

26,274

(680)

506

Other movementsnote (b)

41

-

(90)

Foreign exchange translation differences

1,107

(30)

17

At 30 June 2019

285,168

(10,151)

2,944

 

Notes 

(a)   The balances of the discontinued UK and Europe operations are removed from the opening balances to show the underlying movement from continuing operations (as described in note A2). The £1,703 million of reinsurer's share of insurance contract liabilities in the table above excluded the intra-group reinsurance assets of £1,109 million for the with-profits business ceded to the Asia insurance operations, which were eliminated on consolidation at 1 January 2019. An analysis of the movement in policyholder liabilities and unallocated surplus of with-profits funds held by the UK and Europe operations at 30 June 2019 is provided in note D2.2.

(b)   Other movements include premiums received and claims paid on investment contracts without discretionary participating features, which are taken directly to the statement of financial position in accordance with IAS 39.

 

The total charge for benefit and claims shown in the income statement from continuing operations comprises the amounts shown as 'income and expense included in the income statement' in the table above together with claims paid of £11,037 million in the period net of amounts attributable to reinsurers of £(466) million.

 

C4.2  Asia insurance operations

 



Half year 2019 £m



With-profits 

 business

Unit-linked 

 liabilities 

Other 

business

Total 

At 1 January 2019

42,166

20,182

20,415

82,763

Comprising:






- Policyholder liabilities on the consolidated statement of financial positionnote (v)

39,655

16,368

16,084

72,107


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

2,511

-

-

2,511


- Group's share of policyholder liabilities relating to joint ventures and associatenote (i)

-

3,814

4,331

8,145

Premiums:






New business

594

775

912

2,281


In-force

3,057

932

1,304

5,293



3,651

1,707

2,216

7,574

Surrendersnote (ii)

(207)

(1,070)

(254)

(1,531)

Maturities/deaths

(550)

(69)

(370)

(989)

Net flows

2,894

568

1,592

5,054

Shareholders' transfers post tax

(38)

-

-

(38)

Investment-related items and other movements note (iii)

4,519

582

1,041

6,142

Foreign exchange translation differencesnote (iv)

336

172

168

676

At 30 June 2019

49,877

21,504

23,216

94,597

Comprising:






 - Policyholder liabilities on the consolidated statement of financial positionnote (v)

46,933

17,594

18,442

82,969


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

2,944

-

-

2,944


- Group's share of policyholder liabilities relating to joint ventures and associatenote (i)

-

3,910

4,774

8,684









Half year 2018 £m



With-profits 

 business

Unit-linked 

 liabilities 

Other 

business

Total 

At 1 January 2018

36,437

20,027

17,375

73,839

Comprising:






- Policyholder liabilities on the consolidated statement of financial position

32,963

16,263

13,672

62,898


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

3,474

-

-

3,474


- Group's share of policyholder liabilities relating to joint ventures and associatenote (i)

-

3,764

3,703

7,467

Premiums:






New business

432

870

435

1,737


In-force

2,549

841

1,120

4,510



2,981

1,711

1,555

6,247

Surrendersnote (ii) 

(164)

(1,071)

(312)

(1,547)

Maturities/deaths

(418)

(93)

(327)

(838)

Net flows

2,399

547

916

3,862

Shareholders' transfers post tax

(27)

-

-

(27)

Investment-related items and other movementsnote (iii)

(631)

(652)

(66)

(1,349)

Foreign exchange translation differencesnote (iv)

689

(142)

143

690

At 30 June 2018

38,867

19,780

18,368

77,015

Comprising:






- Policyholder liabilities on the consolidated statement of financial positionnote (v)

35,101

16,094

14,445

65,640


- Unallocated surplus of with-profits funds on the consolidated statement of financial position

3,766

-

-

3,766


- Group's share of policyholder liabilities relating to joint ventures and associatenote (i)

-

3,686

3,923

7,609

Average policyholder liability balancesnote (vi)






Half year 2019

43,294

20,843

21,816

85,953


Half year 2018

34,032

19,903

17,872

71,807

 

Notes

(i)     The Group's investment in joint ventures and associate are accounted for on an equity method and the Group's share of the policyholder liabilities as shown above relate to the life business in China, India and of the Takaful business in Malaysia.

(ii)    The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 3.3 per cent in the first half of 2019 (half year 2018: 3.7 per cent).

(iii)   Investment-related items and other movements in the first half of 2019 primarily represent equity market gains from the with-profits business and falls in bond yields during the period in a number of business units.

(iv)   Movements in the period have been translated at the average exchange rates for the period ended 30 June 2019. The closing balance has been translated at the closing spot rates as at 30 June 2019. Differences upon retranslation are included in foreign exchange translation differences.

(v)   The policyholder liabilities at 30 June 2019 is after deducting the intra-group reinsurance liabilities ceded by the UK and Europe insurance operations of £1,108 million (30 June 2018: £1,181 million; 31 December 2018: £1,109 million) for the with-profits business. Including this amount the Asia total policyholder liabilities are £84,077 million (30 June 2018: £66,821 million; 31 December 2018: £73,216 million).

(vi)   Averages have been based on opening and closing balances, adjusted for any acquisitions, disposals and corporate transactions arising in the period, and exclude unallocated surplus of with-profits funds.

 

C4.3  US insurance operations

 



Half year 2019 £m



Variable annuity

separate account

liabilities

Fixed annuity, 

 GICs and other 

 business

Total

At 1 January 2019

128,220

57,380

185,600

Premiums

4,661

2,399

7,060

Surrenders

(4,643)

(1,755)

(6,398)

Maturities/deaths

(604)

(744)

(1,348)

Net flowsnote (ii)

(586)

(100)

(686)

Transfers from general to separate account

492

(492)

-

Investment-related items and other movementsnote (iii)

16,800

38

16,838

Foreign exchange translation differencesnote (i)

369

31

400

At 30 June 2019

145,295

56,857

202,152








Half year 2018 £m


Variable annuity

separate account

liabilities

Fixed annuity, 

 GICs and other 

 business

Total

At 1 January 2018

130,528

50,196

180,724

Premiums

5,528

1,583

7,111

Surrenders

(4,225)

(1,728)

(5,953)

Maturities/deaths

(540)

(536)

(1,076)

Net flowsnote (ii)

763

(681)

82

Transfers from general to separate account

387

(387)

-

Investment-related items and other movements

582

(685)

(103)

Foreign exchange translation differencesnote (i)

3,286

1,161

4,447

At 30 June 2018

135,546

49,604

185,150

Average policyholder liability balancesnote (iv)





Half year 2019

136,757

57,119

193,876


Half year 2018

133,037

49,900

182,937

 

Notes

(i)     Movements in the period have been translated at an average rate of US$1.29: £1.00 (30 June 2018: US$1.38: £1.00; 31 December 2018: US$1.34: £1.00). The closing balances have been translated at closing rate of US$1.27: £1.00 (30 June 2018: US$1.32: £1.00; 31 December 2018: US$1.27: £1.00). Differences upon retranslation are included in foreign exchange translation differences.

(ii)    Net outflows in the first half of 2019 were £686 million (first half of 2018 inflows: £82 million) with net outflows from the variable annuity business following lower sales in the period offset by higher sales of other business in line with the intention to diversify the US product mix. The net outflow for other business in half year 2019 included annuity payments relating to the John Hancock business which was acquired in the fourth quarter of 2018.

(iii)   Positive investment-related items and other movements in variable annuity separate account liabilities of £16,800 million for the first half of 2019 represent positive separate account return mainly following the increase in the US equity market in the period.

(iv)   Averages have been based on opening and closing balances.

 

C5  Intangible assets

 

The analysis of intangible assets below excludes the UK and Europe operations which are classified as held for distribution as at 30 June 2019. In line with IFRS requirements, the comparatives have not been re-presented. For the analysis of movements during the period, the balances of the discontinued UK and Europe operations are removed from the opening balance.

 

C5.1  Goodwill

 

Goodwill shown on the statement of financial position at 30 June 2019 is wholly attributable to shareholders and represents amounts allocated to entities in Asia in respect of both acquired asset management and life businesses.

 


2019 £m


2018 £m


30 Jun


30 Jun

31 Dec

Carrying value at beginning of period

1,857


1,482

1,482

Reclassification to held for distributionnote D2.2

(1,359)


-

-

Additions in the period

-


149

376

Disposals/reclassifications to held for sale

-


(10)

(10)

Exchange differences

12


(1)

9

Carrying value at end of period

510


1,620

1,857

 

C5.2  Deferred acquisition costs and other intangible assets

 



2019 £m


2018 £m



30 Jun


30 Jun

31 Dec

Deferred acquisition costs and other intangible assets attributable to shareholders:






From continuing operations

12,601


11,112

11,672


From discontinued operations*

-


98

112


Total

12,601


11,210

11,784

Other intangible assets, including computer software, attributable to with-profits funds:






From continuing operations

58


48

56


From discontinued operations*

-


101

83


Total

58


149

139

Total of deferred acquisition costs and other intangible assets

12,659


11,359

11,923

* Classified as discontinued operations at 30 June 2019 (as described in note A2).

 

The deferred acquisition costs and other intangible assets attributable to shareholders comprise: 

 


2019 £m


2018 £m


30 Jun


30 Jun

31 Dec

Deferred acquisition costs related to insurance contracts as classified under IFRS 4

10,326


9,596

10,017

Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4

27


61

78

Deferred acquisition costs related to insurance and investment contracts

10,353


9,657

10,095

Present value of acquired in-force policies for insurance contracts as classified under

IFRS 4 (PVIF)

31


35

34

Distribution rights and other intangibles

2,217


1,518

1,655

Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders

2,248


1,553

1,689

Total of deferred acquisition costs and other intangible assetsnote (a)

12,601


11,210

11,784

Notes

(a)   Total deferred acquisition costs and other intangible assets can be further analysed by business operations as follows:

 


















2019 £m



2018 £m




Deferred acquisition costs












Asia 

insurance

US 

insurance*

UK and

Europe

insurance

All asset

management


PVIF and other 

 intangibles


30 Jun

Total


30 Jun

Total 


31 Dec

Total 


Balance at 1 January:

1,264

8,727

86

18


1,689


11,784


10,866


10,866


Reclassification to held for distribution

-

-

(86)

(18)


(8)


(112)


-


-


Additions

198

285

-

-


652


1,135


511


1,248


Amortisation to the income statement:note (c)















Adjusted IFRS operating profit based on longer-term investment returns

(91)

(94)

-

-


(102)


(287)


(447)


(1,024)



Non-operating profit

-

476

-

-


-


476


(199)


(118)



(91)

382

-

-


(102)


189


(646)


(1,142)


Disposals and transfers

-

-

-

-


(5)


(5)


(11)


(14)


Exchange differences and other movements

12

8

-

-


22


42


218


580


Amortisation of DAC related to net unrealised valuation movements on the US insurance operation's available-for-sale securities recognised within other comprehensive income

-

(432)

-

-


-


(432)


272


246


Balance at 30 June

1,383

8,970

-

-


2,248


12,601


11,210


11,784


* Under the Group's application of IFRS 4, US GAAP is used for measuring the insurance assets and liabilities of its US and certain Asia operations. Under US GAAP, most of the US insurance operation's products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with the emergence of actual and expected gross profits which are determined using an assumption for long-term investment returns for the separate account of 7.4 per cent (half year and full year 2018: 7.4 per cent) (gross of asset management fees and other charges to policyholders, but net of external fund management fees). The amounts included in the income statement and other comprehensive income affect the pattern of profit emergence and thus the DAC amortisation attaching. DAC amortisation is allocated to the operating and non-operating components of the Group's supplementary analysis of profit and other comprehensive income by reference to the underlying items.

†   PVIF and other intangibles comprise PVIF, distribution rights and other intangibles such as software rights. Distribution rights relate to amounts that have been paid or have become unconditionally due for payment as a result of past events in respect of bancassurance partnership arrangements in Asia. These agreements allow for bank distribution of Prudential's insurance products for a fixed period of time. Software rights include amounts reclassified as held for distribution of negative £6 million, additions of £16 million, amortisation of £15 million, disposals of £2 million and a balance at 30 June 2019 of £55 million.

  In January 2019, the Group renewed its regional strategic bancassurance alliance with United Overseas Bank Limited (UOB). The new agreement extends the original alliance, which commenced in 2010, to 2034 and increases the geographical scope to include a fifth market, Vietnam, alongside the existing markets of Singapore, Malaysia, Thailand and Indonesia. As part of this transaction, Prudential has agreed to pay UOB an initial fee of £662 million (translated using a Singapore dollar: £ foreign exchange rate of 1.7360) for distribution rights which are not dependent on future sales volumes. This amount is paid in three instalments of £230 million in February 2019, £331 million in January 2020 and £101 million in January 2021. After allowing for discounting, the amount included in additions in the table above is £630 million.

 

(b)   The DAC amount in respect of US insurance operations comprises amounts in respect of:

 


2019 £m 


2018 £m 


30 Jun


30 Jun

31 Dec

Variable annuity business

9,118


8,258

8,477

Other business

341


241

299

Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive income)*

(489)


(13)

(49)

Total DAC for US operations

8,970


8,486

8,727

* A loss of £(432) million (30 June 2018: a gain of £272 million; 31 December 2018: a gain of £246 million) for shadow DAC amortisation is booked within other comprehensive income to reflect the impact from the positive unrealised valuation movement for half year 2019 of £2,617 million (30 June 2018: negative unrealised valuation movement of £(1,421) million; 31 December 2018: negative unrealised valuation movement of £(1,617) million). These adjustments reflect the movement from period to period, in the changes to the pattern of reported gross profits that would have happened if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 30 June 2019, the cumulative shadow DAC balance as shown in the table above was negative £(489) million (30 June 2018: negative £(13) million; 31 December 2018: negative £(49) million).

 

(c)   Sensitivity of amortisation charge

The amortisation charge to the income statement is reflected in both adjusted IFRS operating profit based on longer-term investment returns and short-term fluctuations in investment returns. The amortisation charge to adjusted IFRS operating profit based on longer-term investment returns in a reporting period comprises:

 

-    A core amount that reflects a relatively stable proportion of underlying premiums or profit; and

-    An element of acceleration or deceleration arising from market movements differing from expectations.

 

In periods where the cap and floor feature of the mean reversion technique (which is used for moderating the effect of short-term volatility in investment returns) are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect.

 

Furthermore, in those periods where the cap or floor is relevant, the mean reversion technique provides no further dampening and additional volatility may result.

 

In the first half of 2019, the DAC amortisation charge for adjusted IFRS operating profit based on longer-term investment returns was determined after including a credit for decelerated amortisation of £148 million (half year 2018 charge for accelerated: £(42) million; full year 2018 charge for accelerated: £194 million). The deceleration arising in the first half of 2019 reflects a mechanical decrease in the projected separate account return for the next five years under the mean-reversion technique. Under this technique the projected level of return for each of the next five years is adjusted so that in combination with the actual rates of return for the preceding three years (including the current period) the assumed long-term annual separate account return of 7.4 per cent is realised on average over the entire eight-year period. The deceleration in DAC amortisation in the first half of 2019 is driven both by the actual separate account return in the period being higher than that assumed and by the higher than expected return in 2016 falling out of the eight-year period.

 

The application of the mean reversion formula has the effect of dampening the impact of equity market movements on DAC amortisation while the mean reversion assumption lies within the corridor. At 30 June 2019, it would take approximate movements in separate account values of more than either negative 35 per cent or positive 30 per cent for mean reversion assumption to move outside the corridor.

 

C6  Borrowings

 

C6.1  Core structural borrowings of shareholder-financed businesses

 




2019 £m


2018 £m




30 Jun


30 Jun

31 Dec

Holding company operations:note (i)





Subordinated debt with no option to substitute to M&GPrudential:






US$250m 6.75% Notes (Tier 1)note (ii)

196


189

196


US$300m 6.5% Notes (Tier 1)note (ii)

236


227

235


US$550m 7.75% Notes (Tier 1)

-


417

-


Perpetual Subordinated Capital Securities (Tier 1)

432


833

431


US$700m 5.25% Notes (Tier 2)

550


530

550


US$1,000m 5.25% Notes (Tier 2)

781


751

780


US$725m 4.375% Notes (Tier 2)

566


544

565


US$750m 4.875% Notes (Tier 2)

584


563

583


Perpetual Subordinated Capital Securities (Tier 2)

2,481


2,388

2,478


€20m Medium Term Notes 2023 (Tier 2)

18


18

18


£435m 6.125% Notes 2031 (Tier 2)

431


430

431


£400m 11.375% Notes 2039 (Tier 2)note (iii)

-


398

399


Subordinated notes (Tier 2)

449


846

848


Subordinated debt total

3,362


4,067

3,757


Senior debt:note (iv)







£300m 6.875% Bonds 2023

295


300

294



£250m 5.875% Bonds 2029

224


249

223


Bank loannote (v)

275


-

275

Total debt before amounts capable of being substituted to M&GPrudentialnote (vii)

4,156


4,616

4,549

Subordinated debt capable of being substituted to M&GPrudential as at 30 Jun 2019:






£600m 5.56% (30 Jun and 31 Dec 2018: 5.0%) Notes 2055 (Tier 2)note (vi)

642


591

591


£700m 6.34% (30 Jun and 31 Dec 2018: 5.7%) Notes 2063 (Tier 2)note (vi)

814


696

696


£750m 5.625% Notes 2051 (Tier 2)

744


-

743


£500m 6.25% Notes 2068 (Tier 2)

498


-

498


US$500m 6.5% Notes 2048 (Tier 2)

391


-

391

Total subordinated debt capable of being substituted to M&GPrudential as at 30 Jun 2019note (vii)

3,089


1,287

2,919

Holding company total

7,245


5,903

7,468

Prudential Capital bank loannote (v)

-


275

-

Jackson US$250m 8.15% Surplus Notes 2027note (viii)

196


189

196

Total (per condensed consolidated statement of financial position)

7,441


6,367

7,664

 

Notes

(i)     The debt tier classifications used are consistent with the treatment of capital for regulatory purposes under the Solvency II regime.

        The Group has designated US$3,725 million (30 June 2018: US$4,275 million; 31 December 2018: US$3,725 million) of its US dollar denominated subordinated debt as a net investment hedge under IAS 39 to hedge the currency risks related to the net investment in Jackson.

(ii)    These borrowings can be converted, in whole or in part, at the Company's option and subject to certain conditions, on any interest payment date, into one or more series of Prudential preference shares.

(iii)   In May 2019, the Company redeemed its £400 million 11.375 per cent Tier 2 subordinated notes.

(iv)   The senior debt ranks above subordinated debt in the event of liquidation. In 2018, as part of its preparation to demerge M&GPrudential, the Group made certain modifications to the terms and conditions of the senior bonds with bondholders' consent. The amendment to the terms and conditions will avoid an event of a technical default on the bonds, should the proposed demerger proceed. The fees paid to bondholders have been adjusted to the carrying value of the bonds and will be amortised in subsequent periods. No other adjustments were made to the carrying value of the debt as a result of the modification.

(v)   The bank loan of £275 million is drawn at a cost of 12-month GBP LIBOR plus 0.33 per cent. The loan, held by Prudential Capital at 30 June 2018, was renewed in December 2018 with Prudential plc being the new holder. The loan matures on 20 December 2022 with an option to repay annually.

(vi)   In the first half of 2019, the Group agreed with the holders of these two subordinated debt instruments that, in return for an increase in the coupon of the two instruments and upfront fees totalling £141 million for both instruments, they would permit the substitution of M&GPrudential as the issuer of the instruments, together with other modifications of terms to ensure the debt meet the requirements of Solvency II. In accordance with IAS 39, this has been accounted for as an extinguishment of the old debt and the issuance of new debt, recognised at fair value. The loss arising from this revaluation has been treated as an expense attributable to the M&GPrudential segment (see note D2.1). The £141 million of upfront fees have been paid by Prudential plc and have been treated as a non-operating expense.

(vii)  The annualised interest of debt that is not capable of being substituted to M&GPrudential, using coupon rates and exchange rates at 30 June 2019, is £(234) million. The interest charge to the income statement for the six months ended 30 June 2019 for debt that is capable of being substituted to M&GPrudential was £(85) million (half year 2018: £(35) million; full year 2018: £(95) million).

(viii) Jackson's borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.

 

Prior to the proposed demerger, the Group expects to rebalance its debt capital across Prudential plc and M&GPrudential. This will include the ultimate holding company of M&GPrudential becoming an issuer of debt following substitution from Prudential plc. Based on the operating environment and economic conditions as at 30 June 2019, the total debt expected to be transferred valued at original proceeds less unamortised transaction costs is £3.2 billion, of which £2.9 billion was held by Prudential plc at 30 June 2019 (IFRS value of £3.1 billion), with a further £0.3 billion (coupon of 3.875 per cent) raised in July 2019.

 

Ratings

Prudential plc has debt ratings from Standard & Poor's, Moody's and Fitch. Prudential plc's long-term senior debt is rated A2 by Moody's, A by Standard & Poor's and A- by Fitch.

 

Prudential plc's short-term debt is rated as P-1 by Moody's, A-1 by Standard & Poor's and F1 by Fitch. 

 

The financial strength of The Prudential Assurance Company Limited is rated A+ by Standard & Poor's, Aa3 by Moody's and AA- by Fitch.

 

Jackson National Life Insurance Company's financial strength is rated AA- by Standard & Poor's and Fitch, A1 by Moody's and A+ by A.M. Best.

 

Prudential Assurance Co. Singapore (Pte) Ltd.'s (Prudential Singapore) financial strength is rated AA- by Standard & Poor's.

 

All the Group's ratings are on a stable outlook. 

 

C6.2  Other borrowings

 

(i)    Operational borrowings attributable to shareholder-financed businesses

 

 

 

2019 £m 

 

2018 £m 

 

 

30 Jun

 

30 Jun

 

31 Dec

Borrowings in respect of short-term fixed income securities programmes

661

 

1,209

 

472

Lease liability for operating leasesnote (a)

229

 

-

 

-

Non-recourse borrowings of consolidated investment fundsnote (b)

545

 

-

 

263

Other borrowingsnote (c)

229

 

409

 

263

Total

1,664

 

1,618

 

998

 

 

 

 

 

 

 

Analysed as:

 

 

 

 

 

Total from continuing operations

 

 

1,488

 

892

Total from discontinued UK and Europe operations*

 

 

130

 

106

 

 

 

1,618

 

998

* Classified as discontinued operations at 30 June 2019 (as described in note A2).

 

Notes

(a)   The Group adopted IFRS 16 as at 1 January 2019, using the modified retrospective approach. Under this approach, comparative information is not restated (as described in note A3).

(b)   In all instances, the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds.

(c)   Other borrowings mainly include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson.

 

(ii)   Borrowings attributable to with-profits businesses

 

 

2019 £m

 

2018 £m

 

30 Jun

 

30 Jun

31 Dec

Non-recourse borrowings of consolidated investment fundsnote (a)

-

 

3,521

3,845

Other borrowings (predominantly obligations under leases)note (b)

238

 

68

95

Total

238

 

3,589

3,940

 

 

 

 

 

Analysed as:

 

 

 

 

Total from continuing operations

 

 

32

19

Total from discontinued UK and Europe operations*

 

 

3,557

3,921

 

 

 

3,589

3,940

* Classified as discontinued operations at 30 June 2019 (as described in note A2).

 

Notes

(a)   In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds.

(b)   The Group adopted IFRS 16 as at 1 January 2019, using the modified retrospective approach. Under this approach, comparative information is not restated. Other borrowings at 30 June 2019 included £213 million relating to lease liabilities (as described in note A3).

 

C7  Deferred tax

 

The analysis below excludes the UK and Europe operations which are classified as held for distribution as at 30 June 2019. The balances of the discontinued UK and Europe operations are removed from the opening balance.

 

The statement of financial position contains the following deferred tax assets and liabilities in relation to:

 

 

Half year 2019 £m

 

At 1 Jan

Reclassification as held for distribution*

Movement in income statement

Movement

through

other comprehensive income and equity

Other movements including foreign currency movements

At 30 Jun

Deferred tax assets

 

 

 

 

 

 

Unrealised losses or gains on investments

113

-

(13)

-

(97)

3

Balances relating to investment and insurance contracts

1

-

-

-

-

1

Short-term temporary differences

2,339

(115)

392

(1)

5

2,620

Capital allowances

15

(11)

(1)

-

-

3

Unused tax losses

127

-

8

-

-

135

Total

2,595

(126)

386

(1)

(92)

2,762

 

 

 

 

 

 

 

Deferred tax liabilities

 

 

 

 

 

 

Unrealised losses or gains on investments

(867)

827

(40)

(459)

74

(465)

Balances relating to investment and insurance contracts

(1,002)

-

(189)

-

2

(1,189)

Short-term temporary differences

(2,097)

183

(139)

16

(5)

(2,042)

Capital allowances

(56)

51

-

-

-

(5)

Total

(4,022)

1,061

(368)

(443)

71

(3,701)

* The Group's UK and Europe operations are classified as discontinued operations at 30 June 2019 (as described in note A2).

 

The principal reason for the increase in deferred tax assets in continuing operations is an increase in the deferred tax asset for losses on derivatives in the US insurance business, which for US tax purposes are spread across three years, reflecting a higher level of losses in the first half of 2019 (and therefore a higher amount deferred to subsequent periods) compared to prior periods.

 

C8  Defined benefit pension schemes

 

The Group's businesses operate a number of pension schemes. The largest defined benefit scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS). The Group also operates two smaller UK defined benefit schemes in respect of Scottish Amicable (SASPS) and M&G (M&GGPS). Historically, all pension surplus and deficits were attributable to subsidiaries of M&GPrudential in line with the Group's allocation policy, with the exception of 30 per cent of the surplus attaching to PSPS, which was allocated to Prudential plc. In preparation for the proposed demerger of M&GPrudential, at 30 June 2019, the 30 per cent of surplus attaching to PSPS was formally reallocated to M&GPrudential Services Limited. Accordingly, at 30 June 2019, the IAS 19 pension assets/liabilities of all the UK schemes of a net deficit of £69 million was included within the held for distribution assets/liabilities of the discontinued UK and Europe operations. In addition to the UK schemes, there are two small defined benefit schemes in Taiwan which have negligible deficits. These other schemes remain with the continuing operations.

 

C9  Share capital, share premium and own shares

 

 

30 Jun 2019

 

30 Jun 2018

 

31 Dec 2018

Issued shares of 5p each

Number of ordinary shares

Share

 capital

Share

premium

 

Number of ordinary shares

Share

 capital

Share premium

 

Number of ordinary shares

Share

 capital

Share

premium

fully paid:

 

£m

£m

 

 

£m

£m

 

 

£m

£m

At 1 January

2,593,044,409

130

1,964

 

2,587,175,445

129

1,948

 

2,587,175,445

129

1,948

Shares issued under share-based schemes

6,751,790

-

10

 

4,697,422

-

6

 

5,868,964

1

16

At end of period

2,599,796,199

130

1,974

 

2,591,872,867

129

1,954

 

2,593,044,409

130

1,964

 

Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received on issue of shares, net of issue costs, and the nominal value of shares issued is credited to the share premium account.

 

At each period end shown below, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows:

 

 

Number of shares

 

Share price range

 

Exercisable

 

to subscribe for

 

from

to

 

by year

30 Jun 2019

3,808,687

 

901p

1,455p

 

2024

30 Jun 2018

5,851,810

 

629p

1,455p

 

2023

31 Dec 2018

4,885,804

 

901p

1,455p

 

2024

 

Transactions by Prudential plc and its subsidiaries in Prudential plc shares

The Group buys and sells Prudential plc shares ('own shares') either in relation to its employee share schemes or via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of £179 million at 30 June 2019 (30 June 2018: £197 million; 31 December 2018: £170 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 30 June 2019, 9.5 million (30 June 2018: 9.7 million; 31 December 2018: 9.6 million) Prudential plc shares with a market value of £163 million (30 June 2018: £168 million; 31 December 2018: £135 million) were held in such trusts, all of which are for employee incentive plans. The maximum number of shares held during the period was 14.1 million which was in March 2019.

 

Within the trust, shares are notionally allocated by business unit reflecting the employees to which the awards were made. On demerger, it is intended that shares allocated to M&GPrudential will be transferred to a separate trust, established by M&GPrudential.

 

The Company purchased the following number of shares in respect of employee incentive plans:

 

 

Number of shares

purchased

(in millions)

Cost

£m

Half year 2019

3.1

49.4

Half year 2018

1.8

32.2

Full year 2018

2.6

44.8

 

The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 30 June 2019 was 3.0 million (30 June 2018: 4.8 million; 31 December 2018: 3.0 million) and the cost of acquiring these shares of £21 million (30 June 2018: £46 million; 31 December 2018: £20 million) is included in the cost of own shares. The market value of these shares as at 30 June 2019 was £52 million (30 June 2018: £84 million; 31 December 2018: £42 million). 

 

All share transactions were made on an exchange other than the Stock Exchange of Hong Kong.

 

Other than set out above, the Group did not purchase, sell or redeem any Prudential plc listed securities during half year 2019 or 2018.

 

D    OTHER NOTES

 

D1  Gain (loss) on disposal of business and corporate transactions undertaken by continuing operations

 

 

2019 £m

 

2018 £m

 

Half year

 

Half year

Full year

Gain on disposalsnote (i)

209

 

-

-

Other transactionsnote (ii)

(196)

 

(57)

(80)

 

13

 

(57)

(80)

 

Notes

(i)     In half year 2019, the £209 million gain on disposals principally relates to profits arising from a reduction in the Group's stake (from 26 per cent to 22 per cent) in its associate in India, ICICI Prudential Life Insurance Company, and the disposal of Prudential Vietnam Finance Company Limited, a wholly owned subsidiary that provides consumer finance.

 

(ii)    Other transaction costs of £(196) million incurred by the continuing operations of the Group in half year 2019 reflect costs related to the preparation for the proposed demerger of M&GPrudential from Prudential plc. These include the following amounts:

 

-      £(18) million transaction related costs, principally fees to advisors;

-      £(141) million being the fee paid to the holders of two subordinated debt instruments as discussed in note C6.1(vi); and

-      £(37) million for one-off costs arising from the separation of the M&GPrudential business from Prudential plc.

 

In 2018, other transaction costs additionally included amounts from exiting the NPH broker-dealer business in the US.

 

D2  Discontinued UK and Europe operations held for distribution

 

In March 2018, the Group announced its intention to demerge its UK and Europe operations (M&GPrudential) from the Group, resulting in two separately listed companies by issuing shares in a newly listed company to existing shareholders. As discussed in note A2, the Group's UK and Europe operations have been classified as discontinued operations and held for distribution in these condensed consolidated financial statements in accordance with IFRS 5, 'Non-current assets held for sale and discontinued operations'.

 

The results for the discontinued operations presented in the consolidated financial statements are analysed below:

 

D2.1  Profit and loss for the period

 

 

 

2019 £m

 

2018 £m

 

 

Half year

 

Half year

Full year

Gross premiums earned

5,907

 

6,555

13,061

Outward reinsurance premiums

(487)

 

(12,598)

(13,137)

Earned premiums, net of reinsurance

5,420

 

(6,043)

(76)

Investment return

13,072

 

53

(3,434)

Other income

643

 

890

1,595

Total revenue, net of reinsurance

19,135

 

(5,100)

(1,915)

Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance

(16,361)

 

6,421

4,977

Fair value loss on debt extinguishmentnote (a)

(169)

 

-

-

Acquisition costs and other expenditure

(1,391)

 

(1,250)

(2,469)

Total charges, net of reinsurance

(17,921)

 

5,171

2,508

Share of profits from joint ventures and associates, net of related tax

33

 

20

52

Profit before tax (being tax attributable to shareholders' and policyholders' returns)note (b)

1,247

 

91

645

Less tax charge attributable to policyholders' returns

(430)

 

10

406

Profit before tax attributable to shareholders

817

 

101

1,051

Total tax charge attributable to policyholders and shareholders

(602)

 

(8)

210

Adjustment to remove tax charge attributable to policyholders' returns

430

 

(10)

(406)

Tax charge attributable to shareholders' returns

(172)

 

(18)

(196)

Profit for the period

645

 

83

855

 

Notes

(a)     As described in note C6.1(vi), during the first half of 2019, the Group agreed to change the terms of certain debt holdings to enable M&GPrudential to be substituted as the issuer of the instruments (in the place of Prudential plc). In return, the Group agreed to pay an initial fee of £141 million and increase the coupon on the debt. In accordance with IAS 39, this transaction has been accounted for as an extinguishment of old debt and issuance of new debt. The change in fair value of debt, driven by the higher coupon, will be borne by M&GPrudential post the proposed demerger and hence it has been included in discontinued profit or loss. The consent cost has been borne by Prudential plc and has been included in continuing operations.

(b)     This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure is not representative of pre-tax profits attributable to shareholders. Profit before all taxes is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of with-profits funds after adjusting for taxes borne by policyholders.

 

Other comprehensive income

The other comprehensive income included in the consolidated statement of comprehensive income in respect of the discontinued UK and Europe operations is as follows:

 

 

 

2019 £m

 

2018 £m

 

 

Half year

 

Half year

Full year

Other comprehensive income (loss) from continuing operations:

 

 

 

 

 

Exchange movements arising during the period

2

 

(3)

-

Items that will not be reclassified to profit or loss

 

 

 

 

Shareholders' share of actuarial gains and (losses) on defined benefit pension schemes:

 

 

 

 

 

Net actuarial (losses) gains on defined benefit pension schemes

(177)

 

104

114

 

Related tax

30

 

(18)

(19)

 

 

(147)

 

86

95

 

Deduct amount attributable to UK with-profit funds transferred to unallocated surplus of with-profit funds, net of related tax

149

 

(21)

(38)

 

 

2

 

65

57

Other comprehensive income for the period, net of related tax

4

 

62

57

 

The profit and other comprehensive income for the period from the discontinued UK and Europe operations were wholly attributable to the equity holders of the Company.

 

Assumption changes

For the shareholder-backed business, the adjusted IFRS operating profit based on longer-term investment returns of the discontinued UK and Europe operations includes a benefit of £127 million (half year 2018: nil; full year 2018: £441 million) relating to changes to annuitant mortality assumptions, including the adoption of the Continuous Mortality Investigation (CMI) 2017 model with an uplift to the calibration such that additional liabilities are held to cover potential differences in experience between the PAC policyholder portfolio and the England and Wales population, in addition to the usual provisions for adverse deviation included when determining policyholder liabilities (half year 2018: no changes; full year 2018: changes to reflect current mortality experience and the adoption of the CMI 2016 model).

 

D2.2  Financial position*

 

 

 

2019 £m

 

2018 £m

 

 

 

 

Other funds and subsidiaries

 

 

 

 

 

 

 

 

 

By operating segment

With-

profits

 

Unit-linked

Annuity

 and

other

Total

insurance

 

Asset

manage-

ment

Elimina-

tions

 

 30 Jun

Total

 

 30 Jun

Total

31 Dec

Total

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwillnote (a)

202

 

 -

 -

202

 

1,153

-

 

1,355

 

1,314

1,359

Deferred acquisition costs and other intangible assets

47

 

 -

110

157

 

17

-

 

174

 

199

195

Property, plant and equipmentnote (b)

997

 

 -

66

1,063

 

370

-

 

1,433

 

588

1,031

Reinsurers' share of insurance contract liabilities

1,136

 

119

1,435

2,690

 

 -

-

 

2,690

 

2,104

2,812

Deferred tax assets

58

 

 -

43

101

 

17

-

 

118

 

130

126

Current tax recoverable

215

 

 -

57

272

 

7

-

 

279

 

255

244

Accrued investment income

1,056

 

89

290

1,435

 

10

-

 

1,445

 

1,471

1,511

Other debtors

2,105

 

773

226

3,104

 

476

(151)

 

3,429

 

3,580

4,189

Investment properties

16,406

 

580

1,648

18,634

 

 -

-

 

18,634

 

17,595

17,914

Investment in joint ventures and associates accounted for using the equity method

566

 

 -

 -

566

 

39

-

 

605

 

687

742

Loansnote (e)

3,756

 

 -

1,779

5,535

 

 -

-

 

5,535

 

5,664

5,567

Equity securities and portfolio holdings in unit trusts

45,743

 

13,678

16

59,437

 

216

-

 

59,653

 

62,832

53,810

Debt securitiesnote (d)

54,796

 

8,727

21,614

85,137

 

37

-

 

85,174

 

79,744

85,956

Derivative assets

2,354

 

2

527

2,883

 

 -

-

 

2,883

 

2,305

2,513

Other investments

6,105

 

9

1

6,115

 

18

-

 

6,133

 

5,158

5,585

Deposits

13,422

 

1,235

2,135

16,792

 

 -

-

 

16,792

 

11,020

10,320

Assets held for sale

6

 

 -

10,164

10,170

 

 -

-

 

10,170

 

12,024

10,578

Cash and cash equivalents

3,311

 

169

792

4,272

 

352

-

 

4,624

 

3,420

4,749

Total assets

152,281

 

25,381

40,903

218,565

 

2,712

(151)

 

221,126

 

210,090

209,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

-

 

-

6,287

6,287

 

1,993

-

 

8,280

 

8,046

8,700

Liabilities 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4)note (f)

118,148

 

21,172

20,284

159,604

 

 -

-

 

159,604

 

154,655

151,555

Unallocated surplus of with-profits fundsnote (f)

15,116

 

 -

 -

15,116

 

 -

 -

 

15,116

 

13,517

13,334

Operational borrowings attributable to shareholder-financed operationsnote (b)

 -

 

4

156

160

 

296

-

 

456

 

130

106

Borrowings attributable to with-profits businesses

3,580

 

 -

 -

3,580

 

-

-

 

3,580

 

3,557

3,921

Obligations under funding, securities lending and sale and repurchase agreements

846

 

 -

208

1,054

 

-

-

 

1,054

 

1,516

1,224

Net asset value attributable to unit holders of consolidated unit trusts

and similar funds

4,827

 

3,659

7

8,493

 

19

-

 

8,512

 

5,781

9,013

Deferred tax liabilities

995

 

 -

163

1,158

 

29

-

 

1,187

 

1,602

1,061

Current tax liabilities

293

 

36

32

361

 

34

-

 

395

 

194

326

Accruals, deferred income and other liabilities

6,988

 

498

2,031

9,517

 

151

(151)

 

9,517

 

6,349

6,442

Provisionsnote (h)

21

 

 -

373

394

 

190

-

 

584

 

684

743

Derivative liabilities

1,467

 

12

1,198

2,677

 

-

-

 

2,677

 

2,082

2,208

Liabilities held for sale

 -

 

 -

10,164

10,164

 

-

 -

 

10,164

 

11,977

10,568

Total liabilities

152,281

 

25,381

34,616

212,278

 

719

(151)

 

212,846

 

202,044

200,501

Total equity and liabilities

152,281

 

25,381

40,903

218,565

 

2,712

(151)

 

221,126

 

210,090

209,201

* The statement of financial position as shown above reflects the segmental position of the discontinued UK and Europe operations and is therefore presented before the elimination of intragroup balances with continuing operations.

  Includes the Scottish Amicable Insurance Fund which, at 30 June 2019, has total assets and liabilities of £4,887 million (30 June 2018: £5,310 million; 31 December 2018: £4,844 million). The PAC with-profits sub-fund (WPSF) mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). The PAC with-profits fund includes £9.6 billion (30 June 2018: £10.2 billion; 31 December 2018: £9.5 billion) of non-profits annuities liabilities.

  The 2018 comparatives assets and liabilities have not been re-presented to be classified as held for distribution on the Group's statement of financial position (as described in note A2).

 

Notes

(a)   Goodwill

At 30 June 2019, £1,153 million goodwill in M&G Investments is attributable to shareholders (30 June 2018: £1,153 million; 31 December 2018: £1,153 million) and £202 million goodwill in venture fund investments is attributable to with-profits funds (30 June 2018: £161 million; 31 December 2018: £206 million).

 

(b)   Property, plant and equipment

As at 1 January 2019, the Group applied IFRS 16, 'Leases', using the modified retrospective approach. Under this approach, comparative information is not restated. The application of the standard has resulted in the recognition of an additional lease liability and a corresponding 'right-of-use' asset of a similar amount as at 1 January 2019. See note A3 for further details. As at 30 June 2019, right-of-use assets recognised in property, plant and equipment amounted to £278 million.

 

(c)   Fair value measurement of financial assets and liabilities

Assets and liabilities carried at fair value on the statement of financial position

The table below shows the assets and liabilities carried at fair value as at each period end indicated, analysed by level of the IFRS 13, 'Fair Value Measurement', defined fair value hierarchy. This hierarchy is based on the inputs to the fair value measurement and reflects the lowest level input that is significant to that measurement.

 

 

 

30 Jun 2019 £m

 

 

Level 1

Level 2

Level 3

 

Analysis of financial investments, net of derivative liabilities by business type

Quoted prices

(unadjusted)

 in active markets

Valuation

based on

significant

observable

market inputs

Valuation

based on

significant

unobservable

market inputs

Total

With-profits

 

 

 

 

Loans

-

-

1,637

1,637

Equity securities and portfolio holdings in unit trusts

41,593

3,758

392

45,743

Debt securities

7,534

46,410

852

54,796

Other investments (including derivative assets)

66

3,282

5,111

8,459

Derivative liabilities

(60)

(1,400)

(7)

(1,467)

Total financial investments, net of derivative liabilities

49,133

52,050

7,985

109,168

Percentage of total (%)

45%

48%

7%

100%

Unit-linked

 

 

 

 

Equity securities and portfolio holdings in unit trusts

12,728

939

11

13,678

Debt securities

1,818

6,909

-

8,727

Other investments (including derivative assets)

4

-

7

11

Derivative liabilities

(4)

(8)

-

(12)

Total financial investments, net of derivative liabilities

14,546

7,840

18

22,404

Percentage of total (%)

65%

35%

0%

100%

Shareholder-backed annuities and other

 

 

 

 

Loans

-

-

303

303

Equity securities and portfolio holdings in unit trusts

232

-

-

232

Debt securities

3,560

17,754

337

21,651

Other investments (including derivative assets)

-

527

19

546

Derivative liabilities

(1)

(1,197)

-

(1,198)

Total financial investments, net of derivative liabilities

3,791

17,084

659

21,534

Percentage of total (%)

18%

79%

3%

100%

UK and Europe total analysis, including other financial liabilities held at fair value

 

 

 

 

Loans

-

-

1,940

1,940

Equity securities and portfolio holdings in unit trusts

54,553

4,697

403

59,653

Debt securities

12,912

71,073

1,189

85,174

Other investments (including derivative assets)

70

3,809

5,137

9,016

Derivative liabilities

(65)

(2,605)

(7)

(2,677)

Total financial investments, net of derivative liabilities

67,470

76,974

8,662

153,106

Investment contract liabilities without discretionary participation features held at fair value

-

(15,695)

-

(15,695)

Borrowings attributable to with-profits businesses

-

-

(1,504)

(1,504)

Net asset value attributable to unit holders of consolidated unit trusts and similar funds

(6,784)

(744)

(984)

(8,512)

Other financial liabilities held at fair value

-

-

(379)

(379)

Total financial instruments at fair value

60,686

60,535

5,795

127,016

Percentage of total (%)

47%

48%

5%

100%

 

 

 

 

 

 

 

 

30 Jun 2018 £m

 

 

Level 1

Level 2

Level 3

 

Analysis of financial investments, net of derivative liabilities by business type

Quoted prices

(unadjusted)

 in active markets

Valuation

based on

significant

observable

market inputs

Valuation

based on

significant

unobservable

market inputs

Total

With-profits

 

 

 

 

Loans

-

-

1,808

1,808

Equity securities and portfolio holdings in unit trusts

43,931

3,322

337

47,590

Debt securities

7,341

43,374

349

51,064

Other investments (including derivative assets)

25

3,099

3,866

6,990

Derivative liabilities

(32)

(961)

-

(993)

Total financial investments, net of derivative liabilities

51,265

48,834

6,360

106,459

Percentage of total (%)

48%

46%

6%

100%

Unit-linked

 

 

 

 

Equity securities and portfolio holdings in unit trusts

14,746

309

17

15,072

Debt securities

2,097

4,439

-

6,536

Other investments (including derivative assets)

4

-

7

11

Derivative liabilities

(3)

(2)

-

(5)

Total financial investments, net of derivative liabilities

16,844

4,746

24

21,614

Percentage of total (%)

78%

22%

0%

100%

Shareholder-backed annuities and other

 

 

 

 

Loans

-

-

296

296

Equity securities and portfolio holdings in unit trusts

170

-

-

170

Debt securities

3,978

17,868

298

22,144

Other investments (including derivative assets)

-

460

2

462

Derivative liabilities

-

(1,084)

-

(1,084)

Total financial investments, net of derivative liabilities

4,148

17,244

596

21,988

Percentage of total (%)

19%

78%

3%

100%

UK and Europe total analysis, including other financial liabilities held at fair value

 

 

 

 

Loans

-

-

2,104

2,104

Equity securities and portfolio holdings in unit trusts

58,847

3,631

354

62,832

Debt securities

13,416

65,681

647

79,744

Other investments (including derivative assets)

29

3,559

3,875

7,463

Derivative liabilities

(35)

(2,047)

-

(2,082)

Total financial investments, net of derivative liabilities

72,257

70,824

6,980

150,061

Investment contract liabilities without discretionary participation features held at fair value

-

(16,355)

-

(16,355)

Borrowings attributable to with-profits businesses

-

-

(1,746)

(1,746)

Net asset value attributable to unit holders of consolidated unit trusts and similar funds

(4,685)

(330)

(767)

(5,782)

Other financial liabilities held at fair value

-

-

(366)

(366)

Total financial instruments at fair value

67,572

54,139

4,101

125,812

Percentage of total (%)

54%

43%

3%

100%

 

 

 

 

 

 

 

 

31 Dec 2018 £m

 

 

Level 1

Level 2

Level 3

 

Analysis of financial investments, net of derivative liabilities by business type

Quoted prices

(unadjusted)

 in active markets

Valuation

based on

significant

observable

market inputs

Valuation

based on

significant

unobservable

market inputs

Total

With-profits

 

 

 

 

Loans

-

-

1,703

1,703

Equity securities and portfolio holdings in unit trusts

37,027

3,728

335

41,090

Debt securities

8,374

44,619

805

53,798

Other investments (including derivative assets)

56

3,149

4,325

7,530

Derivative liabilities

(64)

(1,201)

-

(1,265)

Total financial investments, net of derivative liabilities

45,393

50,295

7,168

102,856

Percentage of total (%)

44%

49%

7%

100%

Unit-linked

 

 

 

 

Equity securities and portfolio holdings in unit trusts

12,150

318

9

12,477

Debt securities

1,750

8,762

-

10,512

Other investments (including derivative assets)

4

1

6

11

Derivative liabilities

(1)

(2)

-

(3)

Total financial investments, net of derivative liabilities

13,903

9,079

15

22,997

Percentage of total (%)

60%

40%

0%

100%

Shareholder-backed annuities and other

 

 

 

 

Loans

-

-

267

267

Equity securities and portfolio holdings in unit trusts

242

-

1

243

Debt securities

3,804

17,470

372

21,646

Other investments (including derivative assets)

1

554

2

557

Derivative liabilities

-

(940)

-

(940)

Total financial investments, net of derivative liabilities

4,047

17,084

642

21,773

Percentage of total (%)

19%

78%

3%

100%

UK and Europe total analysis, including other financial liabilities held at fair value

 

 

 

 

Loans

-

-

1,970

1,970

Equity securities and portfolio holdings in unit trusts

49,419

4,046

345

53,810

Debt securities

13,928

70,851

1,177

85,956

Other investments (including derivative assets)

61

3,704

4,333

8,098

Derivative liabilities

(65)

(2,143)

-

(2,208)

Total financial investments, net of derivative liabilities

63,343

76,458

7,825

147,626

Investment contract liabilities without discretionary participation features held at fair value

-

(15,560)

-

(15,560)

Borrowings attributable to with-profits businesses

-

-

(1,606)

(1,606)

Net asset value attributable to unit holders of consolidated unit trusts and similar funds

(7,443)

(582)

(988)

(9,013)

Other financial liabilities held at fair value

-

-

(355)

(355)

Total financial instruments at fair value

55,900

60,316

4,876

121,092

Percentage of total (%)

46%

50%

4%

100%

 

Level 3 fair value assets and liabilities

At 30 June 2019, the discontinued UK and Europe operations held £5,795 million of net financial instruments at fair value within level 3, which comprises externally valued net assets of £5,632 million, primarily in private equity funds and investments in property funds which are exposed to bespoke properties or risks, and net assets of £163 million relating to investments which are internally valued or subject to a number of unobservable assumptions. The internally valued net assets include investments in debt securities, private equity and venture investment in both debt and equity securities and equity release mortgage loans, which are valued using a discounted cash flow method.

 

Transfers into and transfers out of levels 

During half year 2019, the transfers between levels within the UK and Europe operations portfolio, were primarily transfers from level 1 to level 2 of £104 million and from level 1 to level 3 of £19 million. These transfers which relate mainly to debt securities and other financial investments arose to reflect the change in the observed valuation inputs and in certain cases, the change in the level of trading activities of the securities. In addition, there were transfers from level 2 to level 3 of £58 million and transfers from level 3 to level 2 of £118 million for equity securities and debt securities.

 

Assets and liabilities at amortised cost and their fair value

The table below shows the financial assets and liabilities carried at amortised cost on the statement of financial position and their fair value. Cash deposits, accrued income, other debtors, accruals, deferred income and other liabilities are excluded from the analysis below, as these are carried at amortised cost, which approximates fair value.

 

 

2019 £m

 

 

2018 £m

 

 

30 Jun

 

30 Jun

 

31 Dec

 

Carrying

 value

Fair

value

 

Carrying

 value

Fair

value

 

Carrying

 value

Fair

value

Assets

 

 

 

 

 

 

 

 

Loans

3,595

4,149

 

3,560

4,078

 

3,597

4,008

Liabilities

 

 

 

 

 

 

 

 

Operational borrowings (excluding lease liabilities) attributable to shareholder-financed businesses

(114)

(114)

 

(130)

(130)

 

(106)

(106)

Borrowings (excluding lease liabilities) attributable to the with-profits funds

(2,038)

(2,038)

 

(1,811)

(1,766)

 

(2,315)

(2,085)

Obligations under funding, securities lending and sale and repurchase agreements

(1,054)

(1,054)

 

(1,516)

(1,516)

 

(1,224)

(1,224)

Total financial instruments carried at amortised cost

389

943

 

103

666

 

(48)

593

 

(d)   Debt securities

Debt securities are carried at fair value through profit or loss and are analysed below according to external credit ratings issued, with equivalent ratings issued by different rating agencies grouped together.

 

 

 

 

30 Jun 2019 £m

 

 

 

AAA 

AA+ to AA-

A+ to A-

BBB+

to BBB-

Below BBB- 

Other*

Total 

With-profits

5,401

8,488

13,446

15,641

2,824

8,996

54,796

Unit-linked

578

2,025

1,959

2,450

934

781

8,727

Non-linked shareholder-backed

2,791

6,115

4,615

1,655

211

6,264

21,651

Total debt securities

8,770

16,628

20,020

19,746

3,969

16,041

85,174

 

 

 

 

 

 

 

 

 

30 Jun 2018 £m

 

AAA 

AA+ to AA-

A+ to A-

BBB+

to BBB-

Below BBB- 

Other*

Total 

With-profits

7,091

8,723

11,606

13,544

2,847

7,253

51,064

Unit-linked

358

2,099

1,694

1,448

718

219

6,536

Non-linked shareholder-backed

3,273

6,296

5,138

1,496

223

5,718

22,144

Total debt securities

10,722

17,118

18,438

16,488

3,788

13,190

79,744

 

 

 

 

 

 

 

 

 

31 Dec 2018 £m

 

AAA 

AA+ to AA-

A+ to A-

BBB+

to BBB-

Below BBB- 

Other*

Total 

With-profits

6,890

9,332

11,779

14,712

2,891

8,194

53,798

Unit-linked

1,041

2,459

2,215

3,501

395

901

10,512

Non-linked shareholder-backed

3,007

6,413

4,651

1,515

158

5,902

21,646

Total debt securities

10,938

18,204

18,645

19,728

3,444

14,997

85,956

* Securities with credit ratings classified as 'Other' which are internally rated and are analysed as follows:

 

 

 

 

2019 £m

 

2018 £m

 

 

 

30 Jun

 

30 Jun

31 Dec

 

AAA to A-

8,630

 

7,828

8,150

 

BBB to B-

2,947

 

2,866

3,034

 

Below B- or unrated

4,464

 

2,496

3,813

 

Total UK and Europe

16,041

 

13,190

14,997

 

The Group exposures held by the shareholder-backed business and with-profits funds in sovereign debts and bank debt securities at 30 June 2019 are analysed as follows:

 

Exposure to sovereign debts

 

 

30 Jun 2019 £m

 

30 Jun 2018 £m

 

31 Dec 2018 £m

 

Shareholder-backed

 business

With-

profits

funds

 

Shareholder-backed

 business

With-

profits

funds

 

Shareholder-backed

 business

With-

profits

funds

Italy

-

59

 

-

60

 

-

57

Spain

49

19

 

36

18

 

36

18

France

23

-

 

23

6

 

-

50

Germany*

240

324

 

663

315

 

239

281

Other Eurozone

100

33

 

77

30

 

103

34

Total Eurozone

412

435

 

799

429

 

378

440

United Kingdom

2,235

2,636

 

2,410

3,130

 

2,300

3,013

United States

-

632

 

1

724

 

-

1,261

Other

60

208

 

57

285

 

57

198

Total

2,707

3,911

 

3,267

4,568

 

2,735

4,912

* Including bonds guaranteed by the federal government.

 

Exposure to bank debt securities

 

 

30 Jun 2019 £m

 

2018 £m

 

Senior debt

 

Subordinated debt

 

 

 

30 Jun

31 Dec

Shareholder-backed business

Covered

Senior

Total

 

Tier 1

Tier 2

Total

 

Group

total

 

Group total

Group total

Italy

-

-

-

 

-

-

-

 

-

 

-

-

Spain

-

-

-

 

-

-

-

 

-

 

-

-

France

21

36

57

 

-

-

-

 

57

 

27

20

Germany

-

-

-

 

-

90

90

 

90

 

82

83

Netherlands

-

37

37

 

-

-

-

 

37

 

17

17

Other Eurozone

-

-

-

 

-

-

-

 

-

 

-

-

Total Eurozone

21

73

94

 

-

90

90

 

184

 

126

120

United Kingdom

450

243

693

 

-

67

67

 

760

 

726

674

United States

-

252

252

 

-

29

29

 

281

 

260

253

Asia

-

-

-

 

-

-

-

 

-

 

-

-

Other

-

-

-

 

-

36

36

 

36

 

55

40

Total

471

568

1,039

 

-

222

222

 

1,261

 

1,167

1,087

 

 

 

 

 

 

 

 

 

 

 

 

 

With-profits funds 

 

 

 

 

 

 

 

 

 

 

 

 

Italy

-

39

39

 

-

-

-

 

39

 

38

38

Spain

-

26

26

 

-

-

-

 

26

 

21

17

France

6

363

369

 

-

74

74

 

443

 

312

348

Germany

116

63

179

 

-

8

8

 

187

 

171

185

Netherlands

-

288

288

 

-

-

-

 

288

 

214

249

Other Eurozone

-

86

86

 

-

-

-

 

86

 

27

74

Total Eurozone

122

865

987

 

-

82

82

 

1,069

 

783

911

United Kingdom

877

873

1,750

 

52

322

374

 

2,124

 

1,937

2,096

United States

-

2,771

2,771

 

16

335

351

 

3,122

 

2,519

2,709

Asia

-

127

127

 

-

-

-

 

127

 

38

106

Other

506

998

1,504

 

15

35

50

 

1,554

 

1,650

1,616

Total

1,505

5,634

7,139

 

83

774

857

 

7,996

 

6,927

7,438

 

The tables above exclude assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition, the tables above exclude the proportionate share of sovereign debt holdings of the UK and Europe's joint venture operations.

 

(e) Loans portfolio

The amounts included in the statement of financial position are analysed as follows:

 



30 Jun 2019 £m




30 Jun 2018 £m




31 Dec 2018 £m



Mortgage

 loans*

Policy

loans

Other

loans

Total


Mortgage

 loans*

Policy

loans

Other

loans

Total


Mortgage

 loans*

Policy

loans

Other

loans

Total

With-profits

2,260

3

1,493

3,756


2,267

4

1,672

3,943


2,461

3

1,389

3,853

Non-linked shareholder-backed

1,711

-

68

1,779


1,686

-

35

1,721


1,655

-

59

1,714

Total loans securities

3,971

3

1,561

5,535


3,953

4

1,707

5,664


4,116

3

1,448

5,567

* All mortgage loans are secured by properties.

  Other loans held in the UK with-profits funds are commercial loans and comprise mainly syndicated loans.

 

(f)    Policyholder liabilities and unallocated surplus of with-profits funds

 




Shareholder-backed funds and subsidiaries


Half year 2019 movements £m

With-profits

 sub-fund

Unit-linked  liabilities

Annuity

and other

long-term

 business

Total

discontinued

UK and Europe

operations

At 1 January 2019

124,129

20,717

20,043

164,889

Comprising:






- Policyholder liabilities

110,795

20,717

20,043

151,555


- Unallocated surplus of with-profits funds

13,334

-

-

13,334







Premiums

5,668

447

151

6,266

Surrenders

(2,462)

(1,548)

(25)

(4,035)

Maturities/deaths

(2,309)

(224)

(617)

(3,150)

Net flows

897

(1,325)

(491)

(919)

Shareholders' transfers post tax

(130)

-

-

(130)

Switches

(57)

57

-

-

Investment-related items and other movements

8,431

1,669

732

10,832

Foreign exchange translation differences

(6)

54

-

48

At 30 June 2019

133,264

21,172

20,284

174,720

Comprising:






- Policyholder liabilities

118,148

21,172

20,284

159,604


- Unallocated surplus of with-profits funds

15,116

-

-

15,116













Half year 2018 movements £m





At 1 January 2018

124,699

23,145

33,222

181,066

Comprising:






- Policyholder liabilities

111,222

23,145

33,222

167,589


- Unallocated surplus of with-profits funds

13,477

-

-

13,477






Reclassification of reinsured UK annuity contracts

-

-

(12,002)

(12,002)

as held for sale*









-

Premiums

6,283

516

165

6,964

Surrenders

(2,246)

(1,163)

(37)

(3,446)

Maturities/deaths

(2,205)

(313)

(981)

(3,499)

Net flows

1,832

(960)

(853)

19

Shareholders' transfers post tax

(127)

-

-

(127)

Switches

(89)

89

-

-

Investment-related items and other movements

(476)

(76)

(249)

(801)

Foreign exchange translation differences

17

-

-

17

At 30 June 2018

125,856

22,198

20,118

168,172

Comprising:






- Policyholder liabilities

112,339

22,198

20,118

154,655


- Unallocated surplus of with-profits funds

13,517

-

-

13,517

Average policyholder liability balances






Half year 2019

114,472

20,945

20,163

155,580


Half year 2018

111,781

22,671

26,670

161,122

* The reclassification of the reinsured UK annuity business as held for sale reflects the value of policyholder liabilities held at 1 January 2018. Movements in items covered by the reinsurance contract prior to the 14 March inception date are included within net flows.

  Averages have been based on opening and closing balances and adjusted for any acquisitions, disposals and corporate transactions arising in the period and exclude unallocated surplus of with-profits funds.

‡   Includes the Scottish Amicable Insurance Fund.

 

(g)   Allowance for credit risk

For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest used for discounting projected future annuity payments to policyholders that would have otherwise applied. The credit risk allowance comprises an amount for long-term best estimate defaults and additional provisions for credit risk premium, the cost of downgrades and short-term defaults.

 

The IFRS credit risk allowance made for the UK shareholder-backed fixed and linked annuity business equated to 40 basis points at 30 June 2019 (30 June 2018: 44 basis points; 31 December 2018: 40 basis points). The allowance represented 21 per cent of the bond spread over swap rates (30 June 2018: 26 per cent; 31 December 2018: 22 per cent).

 

The reserves for credit risk allowance at 30 June 2019 for the UK shareholder-backed business were £0.9 billion (30 June 2018: £1.1 billion; 31 December 2018: £0.9 billion). The 30 June 2019 credit risk allowance information is after reflecting the impact of the reinsurance of £12.0 billion of the UK shareholder-backed annuity portfolio to Rothesay Life entered into in March 2018.

 

(h)   Review of past annuity sales

Prudential has agreed with the Financial Conduct Authority (FCA) to review annuities sold without advice after 1 July 2008 to its contract-based defined contribution pension customers. The review is examining whether customers were given sufficient information about their potential eligibility to purchase an enhanced annuity, either from Prudential or another pension provider. A gross provision of £400 million, before allowing for costs incurred to date, had been established at 31 December 2017 to cover the costs of undertaking the review and any related redress. In the first half of 2018, the Group agreed with its professional indemnity insurers that they would meet £166 million of the Group's claims costs, which would be paid as the Group incurred costs/redress with amounts remaining to be paid classed as 'other debtors' in the statement of financial position. Following a reassessment of the provision held, no further amount has been provided in the first half of 2019. The ultimate amount that will be expended by the Group on the review, which is currently expected to be completed in 2019, remains uncertain.

 

D2.3  Cash flows

 


2019 £m


2018 £m


Half year


Half year

Full year

Cash flows from operating activities

404


(1,711)

4

Cash flows from investing activities

(172)


(224)

(358)

Cash flows from financing activities*

(356)


(445)

(758)

Total cash flows in the period

(124)


(2,380)

(1,112)

Cash and cash equivalents at beginning of period

4,749


5,808

5,808

Effect of exchange rate changes on cash and cash equivalents

(1)


(8)

53

Cash and cash equivalents at end of period

4,624


3,420

4,749

* The cash flows from financing activities comprise net cash remittances to Group of £356 million at half year 2019 (30 June 2018: £341 million; 31 December 2018: £654 million) and in 2018 £104 million relating to the redemption of the subordinated guaranteed bond which was held within the with-profits business of the discontinued operations.

 

D3  Contingencies and related obligations

 

In addition to the matters set out in note D2.2(h) in relation to the Financial Conduct Authority review of past annuity sales, the Group is involved in various litigation and regulatory issues. These may from time to time include class actions involving Jackson. While the outcome of such litigation and regulatory issues cannot be predicted with certainty, the Company believes that their ultimate outcome will not have a material adverse effect on the Group's financial condition, results of operations, or cash flows.

 

There have been no material changes to the Group's contingencies and related obligations in the six month period ended 30 June 2019.

 

D4  Post balance sheet events

 

First interim ordinary dividend

The 2019 first interim ordinary dividend approved by the Board of Directors after 30 June 2019 is as described in note B6.

 

D5  Related party transactions

 

There were no transactions with related parties during the six months ended 30 June 2019 which have had a material effect on the results or financial position of the Group.

 

The nature of the related party transactions of the Group has not changed from those described in the Group's consolidated financial statements for the year ended 31 December 2018.

 

Statement of Directors' responsibilities

 

The Directors (who are listed below) are responsible for preparing the Half Year Financial Report in accordance with applicable law and regulations.

 

Accordingly, the Directors confirm that to the best of their knowledge:

 

-    the condensed consolidated financial statements have been prepared in accordance with IAS 34, 'Interim Financial Reporting', as adopted by the European Union;

 

-    the Half Year Financial Report includes a fair review of information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the six months ended 30 June 2019, and their impact on the condensed consolidated financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place during the six months ended 30 June 2019 and that have materially affected the financial position or performance of the Group during that period; and any changes in the related party transactions described in the Group's consolidated financial statements for the year ended 31 December 2018 that could do so.

 

 

Prudential plc Board of Directors:

 

Chairman

Paul Manduca

 

Executive Directors

Michael Wells

Mark FitzPatrick CA

James Turner FCA FCSI FRM

 

Independent Non-executive Directors

The Hon. Philip Remnant CBE FCA

Sir Howard Davies

David Law ACA

Kaikhushru Nargolwala FCA

Anthony Nightingale CMG SBS JP

Alice Schroeder

Thomas Watjen

Fields Wicker-Miurin OBE

 

 

13 August 2019

 

 

Independent review report to Prudential plc 

Conclusion 

We have been engaged by the Company to review the International Financial Reporting Standards (IFRS) condensed set of financial statements in the Half Year Financial Report for the six months ended 30 June 2019 which comprises the Condensed Consolidated Income Statement, the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Statement of Cash Flows and the related explanatory notes.

 

Based on our review, nothing has come to our attention that causes us to believe that the IFRS condensed set of financial statements in the Half Year Financial Report for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union ('EU') and the Disclosure Guidance and Transparency Rules ('the DTR') of the UK's Financial Conduct Authority ('the UK FCA').

 

We have also been engaged by the Company to review the European Embedded Value (EEV) basis supplementary financial information for the six months ended 30 June 2019 which comprises the Summarised Consolidated Income Statement, the Movement in Shareholders' Equity, the Summary Statement of Financial Position and the related explanatory notes.

 

Based on our review, nothing has come to our attention that causes us to believe that the EEV basis supplementary financial information for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with the European Embedded Value Principles issued by the European Insurance CFO Forum in 2016 ('the EEV Principles'), using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information.

 

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the Half Year Financial Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the IFRS condensed set of financial statements or the EEV basis supplementary financial information.

 

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. 

 

The impact of uncertainties due to the UK exiting the European Union on our review

Uncertainties related to the effects of Brexit are relevant to understanding our review of the IFRS condensed financial statements and the EEV basis supplementary financial information. Brexit is one of the most significant economic events for the UK, and at the date of this report its effects are subject to unprecedented levels of uncertainty of outcomes, with the full range of possible effects unknown. An interim review cannot be expected to predict the unknowable factors or all possible future implications for a company and this is particularly the case in relation to Brexit.

 

Directors' responsibilities 

The Half Year Financial Report, including the IFRS condensed set of financial statements contained therein, is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Half Year Financial Report in accordance with the DTR of the UK FCA. The Directors have accepted responsibility for preparing the EEV basis supplementary financial information in accordance with the EEV Principles and for determining the methodology and assumptions used in the application of those principles.

 

The annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the EU. The Directors are responsible for preparing the IFRS condensed set of financial statements included in the Half Year Financial Report in accordance with IAS 34 as adopted by the EU.

 

The EEV basis supplementary financial information has been prepared in accordance with the EEV Principles using the methodology and assumptions set out in the Notes to the EEV basis supplementary financial information. The EEV basis supplementary financial information should be read in conjunction with the IFRS condensed set of financial statements.

 

Our responsibility 

Our responsibility is to express to the Company a conclusion on the IFRS condensed set of financial statements in the Half Year Financial Report and the EEV basis supplementary financial information based on our reviews. 

 

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the DTR of the UK FCA and also to provide a review conclusion to the Company on the EEV basis supplementary financial information. Our review of the IFRS condensed set of financial statements has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. Our review of the EEV basis supplementary financial information has been undertaken so that we might state to the Company those matters we have been engaged to state in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached. 

 

 

Philip Smart

For and on behalf of KPMG LLP

Chartered Accountants

15 Canada Square

London

E14 5GL

13 August 2019

 

I     Additional financial information

 

I(i)  Group capital position

 

(a)   Solvency II capital position

The estimated Group shareholder Solvency II surplus (including M&GPrudential) at 30 June 2019 was £16.7 billion, before allowing for payment of the 2019 first interim ordinary dividend and after allowing for management's calculation of transitional measures reflecting operating and market conditions as at 30 June 2019.

 


2019


2018

Estimated Group shareholder Solvency II capital position*

30 Jun


30 Jun

31 Dec

Own funds (£bn)

30.4


27.5

30.2

Solvency Capital Requirement (£bn)

13.7


13.1

13.0

Surplus (£bn)

16.7


14.4

17.2

Solvency ratio (%)

222%


209%

232%

* The Group shareholder Solvency II capital position excludes the contribution to own funds and the SCR from ring-fenced with-profits funds and staff pension schemes in surplus. The estimated solvency positions include management's calculation of UK transitional measures reflecting operating and market conditions at each valuation date, which at 31 December 2018 reflected the approved regulatory position. 

 

In accordance with Solvency II requirements, these results allow for:

 

-       Capital in Jackson in excess of 250 per cent of the US local Risk Based Capital (RBC) requirement. As agreed with the Prudential Regulation Authority (PRA), this is incorporated in the result above as follows:

 

-   Own funds: represents Jackson's local US risk based available capital less 100 per cent of the US RBC requirement (Company Action Level);

-   Solvency Capital Requirement (SCR): represents 150 per cent of Jackson's local US RBC requirement (Company Action Level); and

-   No diversification benefits are taken into account between Jackson and the rest of the Group.

 

-        Matching adjustment for UK annuities and volatility adjustment for US dollar denominated Hong Kong with-profits business, based on approvals from the PRA and calibrations published by the European Insurance and Occupational Pensions Authority (EIOPA); and

 

-       UK transitional measures, which have been recalculated using management's calculation of the impact of operating and market conditions at the valuation date. Transitional measures were last approved by the PRA as at 31 December 2018. Applying this approved regulatory transitional amount would result in the estimated Group shareholder Solvency II surplus reducing from £16.7 billion to £16.6 billion as at 30 June 2019.

 

The Group shareholder Solvency II capital position excludes:

 

-       A portion of Solvency II surplus capital (£2.0 billion at 30 June 2019) relating to the Group's Asia life operations, primarily due to the Solvency II definition of 'contract boundaries', which prevents some expected future cash flows from being recognised;

-       The contribution to own funds and the SCR from ring-fenced with-profits funds in surplus (representing £6.6 billion of surplus capital from UK with-profits funds at 30 June 2019) and from the shareholders' share of the estate of with-profits funds; and

-       The contribution to own funds and the SCR from staff pension schemes in surplus.

 

It also excludes unrealised gains on certain derivative instruments taken out to protect Jackson against declines in long-term interest rates. At Jackson's request, the Department of Insurance Financial Services renewed its approval to carry these instruments at book value in the local statutory returns for the period 31 December 2018 to 1 October 2019. At 30 June 2019, applying this approval had the effect of decreasing local available statutory capital and surplus (and by extension Solvency II own funds and Solvency II surplus) by £0.4 billion net of tax. This arrangement reflects an elective long-standing practice first put in place in 2009, which can be unwound at Jackson's discretion.

 

Further information on the consolidated Solvency II capital position for the Group and The Prudential Assurance Company Limited (PAC) is published annually in the Solvency and Financial Condition Reports which are available on the Group's website. 

 

Analysis of movement in Group capital position

A summary of the estimated movement in Group Solvency II surplus from £17.2 billion at 31 December 2018 to £16.7 billion at 30 June 2019 is set out in the table below. The movement from the Group Solvency II surplus at 31 December 2017 to the Group Solvency II surplus at 30 June 2018 and 31 December 2018 is included for comparison.

 



 2019 £bn


2018 £bn

Analysis of movement in Group shareholder Solvency II surplus

Half year


Half year

Full year

Estimated Solvency II surplus at beginning of period

17.2


13.3

13.3







Underlying operating experience

2.1


1.7

4.1

Management actions

0.0


0.1

0.1

Operating experience

2.1


1.8

4.2







Non-operating experience (including market movements)

(1.5)


0.0

(1.2)

M&GPrudential transactions

-


0.1

0.4

Other capital movements:






Net subordinated debt issuance/redemption

(0.4)


-

1.2


Foreign currency translation impacts

0.0


0.1

0.5


Dividends paid

(0.9)


(0.8)

(1.2)

Model changes

0.2


(0.1)

0.0

Estimated Solvency II surplus at end of period

16.7

14.4

17.2

 

The estimated movement in Group Solvency II surplus over the first half of 2019 is driven by:

 

-       Operating experience of £2.1 billion: generated by in-force business and new business written in 2019, after allowing for amortisation of the UK transitional measures;

-       Non-operating experience of £(1.5) billion: mainly as a result of the negative impact of market movements during the first half of the year, after allowing for the recalculation of the UK transitional measures at the valuation date. This includes Jackson hedging losses net of reserve movements, together with the effect of corporate transactions in the period including a £(0.6) billion Solvency II impact from the extension of the UOB bancassurance distribution deal and £(0.2) billion of costs associated with the demerger, offset by £0.2 billion of gains on disposals in the period;

-       Other capital movements of £(1.3) billion: comprise a decrease in surplus from the impact of debt redeemed during 2019 and from the payment of the 2018 second interim dividend; and

-       Model changes of £0.2 billion: reflecting internal model changes approved by the PRA and other minor internal model calibration changes made in the period.

 

Analysis of Group SCR

The split of the Group's estimated SCR by risk type, including the capital requirements in respect of Jackson's risk exposures based on 150 per cent of US RBC requirements (Company Action Level) but with no diversification between Jackson and the rest of the Group, is as follows:

 

 

 

30 Jun 2019


30 Jun 2018


31 Dec 2018

Split of the Group's

estimated SCR

% of

undiversified

SCR

% of

diversified

SCR


% of

undiversified

SCR

% of

diversified

SCR


% of

undiversified

SCR

% of

diversified

SCR

Market

59%

76%


56%

70%


57%

70%


Equity

14%

25%


15%

25%


13%

23%


Credit

23%

41%


21%

36%


23%

38%


Yields (interest rates)

17%

9%


14%

7%


16%

6%


Other

5%

1%


6%

2%


5%

3%

Insurance

23%

16%


25%

20%


24%

20%


Mortality/morbidity

5%

2%


5%

2%


5%

2%


Lapse

14%

13%


15%

16%


15%

17%


Longevity

4%

1%


5%

2%


4%

1%

Operational/expense

11%

7%


12%

7%


12%

8%

Foreign exchange translation

7%

1%


7%

3%


7%

2%

 

Reconciliation of IFRS shareholders' equity to Group shareholder Solvency II own funds 

 


2019 £bn


2018 £bn


30 Jun


30 Jun

31 Dec

IFRS shareholders' equity

19.7


15.9

17.2

Restate US insurance entities from IFRS basis to local US statutory basis

(4.2)


(2.6)

(2.5)

Remove DAC, goodwill and other intangibles

(5.4)


(4.1)

(4.6)

Add subordinated debt

7.0


5.8

7.2

Impact of risk margin (net of transitional measures)

(3.8)


(3.8)

(3.8)

Add value of shareholder transfers

5.5


5.5

5.3

Liability valuation differences

13.1


12.2

13.3

Increase in net deferred tax liabilities resulting from liability valuation differences above

(1.6)


(1.4)

(1.5)

Other

0.1


0.0

(0.4)

Estimated shareholder Solvency II own funds

30.4


27.5

30.2

 

The key items of the reconciliation as at 30 June 2019 are:

 

-       £(4.2) billion representing the adjustment required to the Group's IFRS shareholders' equity in order to convert Jackson's contribution from an IFRS basis to the local statutory valuation basis. This item also reflects a de-recognition of own funds of £1.0 billion, equivalent to the value of 100 per cent of US RBC requirements (Company Action Level), as agreed with the PRA;

-       £(5.4) billion due to the removal of DAC, goodwill and other intangibles from the IFRS statement of financial position;

-       £7.0 billion due to the addition of subordinated debt, which is treated as available capital under Solvency II but as a liability under IFRS;

-       £(3.8) billion due to the inclusion of a risk margin for the UK and Asia non-hedgeable risks, net of £1.7 billion from transitional measures (after allowing for the recalculation of transitional measures as at 30 June 2019), which are not applicable under IFRS;

-       £5.5 billion due to the inclusion of the value of future shareholder transfers from with-profits business (excluding the shareholders' share of the with-profits estate, for which no credit is given under Solvency II), which is excluded from the determination of the Group's IFRS shareholders' equity;

-       £13.1 billion mainly due to differences in insurance valuation requirements between Solvency II and IFRS, with Solvency II own funds partially capturing the value of in-force business, which is excluded from IFRS;

-       £(1.6) billion due to the impact on the valuation of net deferred tax liabilities resulting from the liability valuation differences noted above; and

-       £0.1 billion due to other items, including the impact of revaluing loans, borrowings and debt from IFRS to Solvency II.

 

Sensitivity analysis

The estimated sensitivity of the Group Solvency II capital position to significant changes in market conditions is as follows:

 



30 Jun 2019


31 Dec 2018

Impact of market sensitivities

Solvency II

surplus £bn

Solvency

ratio %


Solvency II

surplus £bn

Solvency

ratio %

Base position

16.7

222%


17.2

232%

Impact of:







20% instantaneous fall in equity markets

(0.5)

1%


(1.6)

(10)%


40% fall in equity marketsnote (1)

(2.7)

(12)%


(4.0)

(28)%


50 basis points reduction in interest ratesnotes (2),(3)

(2.5)

(26)%


(1.8)

(21)%


100 basis points increase in interest ratesnote (3)

0.8

18%


1.2

20%


100 basis points increase in credit spreadsnote (4)

(1.9)

(11)%


(1.7)

(9)%

 

Notes

(1)  Where hedges are dynamic, rebalancing is allowed for by assuming an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period.

(2)  Subject to a floor of zero for Asia and US interest rates.

(3)  Allowing for further transitional measures recalculation after the interest rate stress.

(4)  US RBC solvency position included using a stress of 10 times expected credit defaults.

 

The Group believes it is positioned to withstand significant deteriorations in market conditions and it continues to use market hedges to manage some of this exposure across the Group, where it believes the benefit of the protection outweighs the cost. The sensitivity analysis above allows for predetermined management actions and those taken to date, but does not reflect all possible management actions which could be taken in the future.

 

UK PAC Solvency II capital positionnotes 1,2

On the same basis as above, the estimated shareholder Solvency II surplus for PAC and its subsidiariesnote 2 at 30 June 2019 was £3.7 billion, after allowing for the recalculation of transitional measures as at 30 June 2019. This relates to shareholder-backed business including future shareholder transfers from the with-profits funds, but excludes the shareholders' share of the estate, in line with Solvency II requirements.

 


2019


2018

Estimated UK PAC shareholder Solvency II capital position*

30 Jun


30 Jun

31 Dec

Own funds(£bn)

8.9


14.7

8.8

Solvency Capital Requirement (£bn)

5.2


7.2

5.1

Surplus (£bn)

3.7


7.5

3.7

Solvency ratio (%)

171%


203%

172%

* The UK PAC shareholder Solvency II capital position excludes the contribution to own funds and the SCR from ring-fenced with-profits funds and staff pension schemes in surplus. The estimated solvency positions include management's calculation of UK transitional measures reflecting both operating and market conditions at each valuation date, which at 31 December 2018 reflected the approved regulatory position.

  The 30 June 2018 UK PAC shareholder Solvency II capital position included the contribution to own funds and the SCR from the Hong Kong business, which was subsequently transferred to Prudential Corporation Asia Limited (PCA) in December 2018.  

 

The UK PAC Solvency II surplus at 30 June 2019 is unchanged since 31 December 2018:

-       Operating experience of £0.4 billion: generated by in-force business and new business written in 2019, after allowing for amortisation of the UK transitional measures. This includes a £0.1 billion benefit from the impact of updates to UK longevity best estimate assumptions;

-       Capital movements of £(0.3) billion: reflecting cash remittances made to the Group over the period; and

-       Other movements of £(0.1) billion.

 

Whilst there is a large surplus in the UK with-profits funds, this is ring-fenced from the shareholder balance sheet and is therefore excluded from both the Group and the UK PAC shareholder Solvency II surplus results. The estimated UK with-profits funds Solvency II surplus at 30 June 2019 was £6.6 billion, after allowing for recalculation of transitional measures as at 30 June 2019.

 


2019


2018

Estimated UK with-profits Solvency II capital position*

30 Jun


30 Jun

31 Dec

Own funds (£bn)

11.1


9.4

9.7

Solvency Capital Requirement (£bn)

4.5


3.9

4.2

Surplus (£bn)

6.6


5.5

5.5

Solvency ratio (%)

249%


244%

231%

* The estimated solvency positions include management's calculation of UK transitional measures reflecting operating and market conditions at each valuation date, which as at 31 December 2018 reflected the approved regulatory position. 

 

Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II own fundsnote 1

 

A reconciliation between the IFRS unallocated surplus and Solvency II own funds for UK with-profits business is as follows:

 



2019 £bn


2018 £bn



30 Jun


30 Jun

31 Dec

IFRS unallocated surplus of UK with-profits funds

15.1


13.5

13.3

Value of shareholder transfers

(2.7)


(2.7)

(2.4)

Risk margin (net of transitional measures)

(1.1)


(1.0)

(1.0)

Other valuation differences

(0.2)


(0.4)

(0.2)

Estimated with-profits Solvency II own funds

11.1

9.4

9.7

 

Notes

1      The UK with-profits capital position includes the PAC with-profits sub-fund, the Scottish Amicable Insurance Fund (SAIF) and the Defined Charge Participating Sub-Fund.

2      The results include the insurance subsidiaries of PAC being Prudential International Assurance plc and Prudential Pensions Limited and exclude the contribution from Prudential Holborn Life Limited in order to align the segmental definitions applied within IFRS and EEV reporting. Prudential Holborn Life Limited is expected to be liquidated prior to the demerger.

 

Statement of independent review in respect of Solvency II Capital Position at 30 June 2019

 

The methodology, assumptions and overall result have been subject to examination by KPMG LLP.

 

M&GPrudential shareholder Solvency II capital position

 

Following the proposed demerger of M&GPrudential from Prudential plc, the PRA will assume the role of the group-wide supervisor for the M&GPrudential Group with the Solvency II framework continuing to apply.

 

The M&GPrudential Group has requested approval from the Prudential Regulatory Authority (PRA) to amend the group internal model to apply at the level of the M&GPrudential Group, rather than at the level of the existing Prudential Group. The decision is pending and is expected to be provided shortly before the planned demerger, such that the Prudential Group internal model remains in place until the demerger with M&GPrudential's model commencing from this point. The results set out below should not be interpreted as representing the Pillar I output from an approved Solvency II internal model for M&GPrudential and are subject to change.

 

Based on the assumptions that underpin the current approved Group internal model the estimated shareholder Solvency II surplus for the M&GPrudential Group at 30 June 2019 was £3.9 billion. The estimated pro forma position, assuming that the proposed demerger of M&GPrudential from Prudential plc had been completed as at 30 June 2019 based on the operating environment and economic conditions as at that date, was £3.9 billion (equivalent to a cover ratio of 169 per cent).

 

Estimated M&GPrudential Group Solvency II capital position*

As reportednote

Adjustments

Pro Forma

Own funds (£bn)

9.5

0.0

9.5

Solvency Capital Requirement (£bn)

5.6

0.0

5.6

Surplus (£bn)

3.9

0.0

3.9

Solvency ratio (%)

169%

0%

169%

*  Based on outputs from the M&GPrudential Group internal model which has not yet been approved by the PRA.

†   The adjustments as shown in the table above, which result in an increase in surplus of £nil billion, represent the estimated impact on the M&GPrudential Group shareholder Solvency II capital position of the proposed demerger. The adjustments, which are based on current indicative estimates and are subject to change, include:

-     The expected impact of the transfer of £3.2 billion of subordinated debt to M&GPrudential by substituting M&GPrudential in the place of Prudential plc as issuer of such debt;

-     The expected proceeds of £3.0 billion from a pre-demerger dividend to be paid by M&GPrudential to Prudential plc shortly before demerger, together with planned dividends of £0.3 billion expected to be paid earlier. All dividends are subject to the customary legal and governance considerations required before approval by the M&GPrudential Board; and

-     £0.1 billion of other associated effects.

‡   No account has been taken of any trading and other changes in the financial position of the M&GPrudential Group after 30 June 2019, thus the pro forma shareholder Solvency II capital position does not reflect the actual shareholder Solvency II capital position of the M&GPrudential Group following the completion of the proposed demerger.

 

Note

The M&GPrudential Group Solvency II capital position at 30 June 2019 has been subject to examination by KPMG LLP.

 

(b)   Local Capital Summation Method (LCSM)

Following the proposed demerger of M&GPrudential from Prudential plc, the Hong Kong Insurance Authority (IA) will assume the role of the group-wide supervisor for the retained Group (excluding M&GPrudential). The retained Group will no longer be subject to Solvency II capital requirements. Ultimately, Prudential plc will become subject to the Group Wide Supervision (GWS) framework which is currently under development by the Hong Kong IA for the industry and is not expected to come into force until the second half of 2020 (subject to the legislative process) at the earliest.

 

Until Hong Kong's GWS framework comes into force, Prudential will apply the local capital summation method (LCSM) that has been agreed with the Hong Kong IA to determine group regulatory capital requirements (both minimum and prescribed levels). The summation of local statutory capital requirements across the group will be used to determine group regulatory capital requirements, with no allowance for diversification between business operations. The group available capital will be determined by the summation of available capital across local solvency regimes for regulated entities and IFRS net assets (with adjustments described below) for non-regulated entities. The Hong Kong IA has yet to make any final decisions regarding the GWS framework for the industry and it continues to consider and consult on the proposed legislation and related guidelines. The amounts below should not therefore be interpreted as representing the results or requirements under the industry-wide GWS framework and are not intended to provide a forecast of the eventual position.

 

In determining the LCSM available capital and minimum required capital the following principles have been applied:

 

-       For regulated insurance entities, available and required capital is based on the local solvency regime applicable in each jurisdiction, with required capital set at the solo legal entity statutory minimum capital requirements. The treatment of participating funds is consistent with the local basis. For the US insurance entities, available and required capital is based on the local US RBC framework set by the NAIC with required capital set at 100 per cent of the Company Action Level;

-       For asset management operations and other regulated entities, the shareholder capital position is derived based on the sectoral basis applicable in each jurisdiction, with required capital based on the solo legal entity statutory minimum capital requirement;

-       For non-regulated entities, the available capital is based on IFRS net assets after deducting intangible assets. No required capital is held in respect of unregulated entities;

-       Investments in subsidiaries, joint ventures and associates (including, if any, loans that are recognised as capital on the receiving entity's balance sheet) are eliminated from the relevant holding company to prevent the double counting of available capital; and

-       The Hong Kong IA has agreed that certain specific bonds (being those subordinated debt instruments expected to be held by Prudential plc at the date of demerger) can be included as part of the group's capital resources for the purposes of satisfying group minimum and prescribed capital requirements from the date of demerger as part of the LCSM. Grandfathering provisions under the GWS framework remain subject to further consultation and the Hong Kong legislative process in due course.

 

At 30 June 2019 the Prudential Group's aggregated (ie policyholder and shareholder) surplus of available capital over the Group minimum capital requirement calculated using the LCSM outlined above, and excluding M&GPrudential, was £16.0 billion before allowing for the payment of the 2019 first interim ordinary dividend.

 

The Group holds material participating business in Hong Kong, Singapore and Malaysia. If the available capital and minimum capital requirement attributed to this business is excluded, then the Prudential Group shareholder surplus of available capital over the Group minimum capital requirement at 30 June 2019, using the LCSM outlined above, and excluding M&GPrudential, was £7.4 billion before allowing for the payment of the 2019 first interim ordinary dividend. This is analysed as follows:

 

Estimated Group shareholder LCSM capital position at 30 June 2019





Asia £bn

US £bn

Unallocated to

a segment £bn

Total £bn

Available Capital

5.8

3.9

0.9

10.6

Minimum Required Capital

2.2

1.0

-

3.2

LCSM surplus

3.6

2.9

0.9

7.4

 

The estimated pro forma shareholder position presented below assumes the proposed demerger of M&GPrudential from Prudential plc had completed as at 30 June 2019.

 

Estimated Group shareholder LCSM pro-forma capital position as at 30 June 2019












As reported





Consolidated

Less

Policyholder

Shareholder


Adjustments

Pro Forma

Available Capital* (£bn)

22.8

(12.2)

10.6


+0.3

10.9

Minimum Required Capital (£bn)

6.8

(3.6)

3.2


-

3.2

LCSM surplus (£bn)

16.0

(8.6)

7.4


+0.3

7.7

LCSM ratio (%)

337%

(5)%

332%


+8%

340%

*  Excludes M&GPrudential and includes £2.9 billion of subordinated debt issued by Prudential plc that is expected to be transferred to M&GPrudential pre-demerger and hence has not been grandfathered with Hong Kong IA.

†   The adjustments as shown in the table above, which result in an increase in surplus of £0.3 billion, represent the estimated impact on the retained Prudential Group shareholder LCSM capital position of the proposed demerger. The adjustments, which are based on current indicative estimates and are subject to change, include:

- A reduction of £2.9 billion for the expected impact of the transfer of subordinated debt to M&GPrudential by substituting M&GPrudential in the place of Prudential as issuer of such debt. The £2.9 billion represents debt capable of being substituted that was held at 30 June 2019. A further £0.3 billion was raised in July bringing the total of subordinated debt expected to be transferred to £3.2 billion;

- An increase for the expected proceeds of £3.0 billion from a pre-demerger dividend to be paid by M&GPrudential to Prudential plc shortly before demerger, together with planned dividends of £0.3 billion expected to be paid earlier. All dividends are subject to the customary legal and governance considerations required before approval by the M&GPrudential Board; and

- A reduction of £0.1 billion for expected directly attributable transaction costs associated with the proposed demerger that have yet to be incurred at 30 June 2019.

‡       No account has been taken of any trading and other changes in financial position of the Prudential Group after 30 June 2019, thus the pro forma shareholder LCSM capital position does not reflect the actual shareholder LCSM capital position of the retained Prudential Group following the completion of the proposed demerger.

 

Reconciliation of Group shareholder Solvency II capital position to shareholder LCSM capital position at 30 June 2019

 


Available capital £bn

Capital requirements £bn

Surplus

£bn

Estimated Group shareholder Solvency II capital position

30.4

13.7

16.7

Remove M&GPrudential

(9.5)

(5.6)

(3.9)

Reduction in capital requirements from Solvency II SCR to Solvency II MCR

-

(5.1)

5.1

Adjust insurance entities' Solvency II available capital to local basis

(10.3)

-

(10.3)

Other

-

0.2

(0.2)

Estimated Group shareholder LCSM capital position (excluding M&GPrudential)

10.6

3.2

7.4

 

The key items of the reconciliation as at 30 June 2019 are: 

 

-    Removal of the M&GPrudential Solvency II own funds (£9.5 billion) and SCR (£5.6 billion) at 30 June 2019;

-    £(5.1) billion representing the adjustment required to restate Solvency II SCR to Solvency II MCR, including the reduction in US entities' required capital from the 150 per cent of the US Risk Based Capital requirement (Company Action Level) allowed for within the Solvency II SCR to the 100 per cent relevant to the MCR reducing required capital by £0.5 billion;

-    £(10.3) billion due to valuation differences between Solvency II and the local solvency regime in each jurisdiction. This mainly relates to the removal of the value of in-force business (restricted by the Solvency II definition of 'contract boundaries') captured in the Solvency II own funds for the Asian business but excluded from the local basis. For Jackson it includes the reversal of the reduction made to Solvency II available capital equal to 100 per cent of the US Risk Based Capital requirement (Company Action Level) increasing available capital by £1.0 billion; and

-    £0.2 billion due to other items.

 

Reconciliation of Group IFRS shareholders' equity to shareholder LCSM available capital position at 30 June 2019

 


Available capital £bn

Group IFRS shareholders' equity

19.7

Remove M&GPrudential

(8.3)

Add subordinated debt at IFRS book value

6.5

Valuation differences

6.1

Remove DAC, goodwill and intangibles

(13.1)

Other

(0.3)

Estimated Group shareholder LCSM available capital (excluding M&GPrudential)

10.6

 

Valuation differences of £6.1 billion primarily relate to differences on the basis of valuing assets and liabilities between IFRS and local statutory valuation rules, including reductions for inadmissible assets. The most significant difference arises in Jackson where local statutory reserves are reduced by an allowance for future surrender charges. IFRS makes no such allowance but instead defers acquisition costs on the balance sheet as a separate asset (which is not recognised on the statutory balance sheet).

 

I(ii)   Funds under management

 

(a)    Summary

For Prudential's asset management businesses, funds managed on behalf of third parties are not recorded on the statement of financial position. They are, however, a driver of profitability. Prudential therefore analyses the movement in the funds under management each period, focusing on those which are external to the Group and those primarily held by the Group's insurance businesses. The table below analyses, by segment, the funds of the Group held in the statement of financial position and the external funds that are managed by Prudential's asset management businesses.

 



2019 £bn


2018 £bn



30 Jun


30 Jun

31 Dec

Asia operations:






Internal funds

102.8


83.7

89.5


Eastspring Investments external funds

67.0


52.4

61.1



169.8


136.1

150.6

US operations - internal funds

204.1


183.7

183.1

Other operations

2.2


2.7

2.4

Total funds under management from continuing operations

376.1


322.5

336.1

M&GPrudential:






Internal funds, including PruFund-backed products

188.1


176.4

174.3


External funds

153.0


165.5

146.9

Total funds under management from discontinued UK and Europe operations

341.1


341.9

321.2

Total Group funds under managementnote

717.2


664.4

657.3

 

Note

Total Group funds under management comprise:

 




2019 £bn


2018 £bn




30 Jun


30 Jun

31 Dec


Total investments per the consolidated statement of financial position

496.0


448.0

449.6


External funds of M&GPrudential and Eastspring Investments (as analysed in note (b) below)

219.9


217.9

208.0


Internally managed funds held in joint ventures and other adjustments

1.3


(1.5)

(0.3)


Prudential Group funds under management

717.2


664.4

657.3

 

(b)    Investment products - external funds under management

 



Half year 2019 £m



At 1 Jan 2019

Market gross inflows

Redemptions

Market and other movements

At 30 Jun 2019

Eastspring Investments

61,057

119,791

(117,711)

3,827

66,964

M&G Investments:






Wholesale/Direct

69,465

11,867

(16,118)

4,267

69,481

Institutional

77,481

5,926

(6,261)

6,334

83,480

Total M&G Investmentsnote (1)

146,946

17,793

(22,379)

10,601

152,961

Group totalnote (2)

208,003

137,584

(140,090)

14,428

219,925









Half year 2018 £m



At 1 Jan 2018

Market gross inflows

Redemptions

Market and other movements

At 30 Jun 2018

Eastspring Investments

55,885

105,792

(105,990)

(3,250)

52,437

M&G Investments:






Wholesale/Direct

79,697

16,471

(14,317)

(2,030)

79,821

Institutional

84,158

4,930

(3,536)

117

85,669

Total M&G Investmentsnote (1)

163,855

21,401

(17,853)

(1,913)

165,490

Group totalnote (2)

219,740

127,193

(123,843)

(5,163)

217,927









Full year 2018 £m



At 1 Jan 2018

Market gross inflows

Redemptions

Market and other movements

At 31 Dec 2018

Eastspring Investments

55,885

212,070

(212,156)

5,258

61,057

M&G Investments:






Wholesale/Direct

79,697

24,584

(29,452)

(5,364)

69,465

Institutional

84,158

12,954

(18,001)

(1,630)

77,481

Total M&G Investmentsnote (1)

163,855

37,538

(47,453)

(6,994)

146,946

Group totalnote (2)

219,740

249,608

(259,609)

(1,736)

208,003

 

Notes

(1)  The results exclude the contribution from PruFund products net inflows of £3.5 billion in half year 2019 (half year 2018: £4.4 billion; full year 2018: £8.5 billion) and funds under management of £49.6 billion as at 30 June 2019 (30 June 2018: £40.3 billion; 31 December 2018: £43.0 billion).

(2)  The £219.9 billion (30 June 2018: £217.9 billion; 31 December 2018: £208 billion) investment products comprise of £209.4 billion (30 June 2018: £207.9 billion; 31 December 2018: £196.4 billion) plus Asia Money Market Funds of £10.5 billion (30 June 2018: £10.0 billion; 31 December 2018: £11.6 billion).

 

I(iii)  Holding company cash flow*

 




2019 £m


2018 £m




Half year


Half year

Full year

Net cash remitted by business units:





From continuing operations





Asia net remittances to the Group

451


391

699

US remittances to the Group

400


342

342

Other UK (including Prudential Capital) paid to the Group

5


37

37

Total continuing operations

856


770

1,078

From discontinued UK and Europe operations

356


341

654

Net remittances to the Group from business unitsnote (a)

1,212


1,111

1,732

Net interest paid

(218)


(187)

(366)

Tax received

93


81

142

Corporate activities

(97)


(113)

(206)

Total central outflows

(222)


(219)

(430)

Operating holding company cash flow before dividend

990


892

1,302

Dividend paid

(870)


(840)

(1,244)

Operating holding company cash flow after dividend

120


52

58

Non-operating net cash flowsnote (b)

(999)


(106)

913

Total holding company cash flow

(879)


(54)

971


Cash and short-term investments at beginning of period

3,236


2,264

2,264


Foreign exchange movements

8


-

1

Cash and short-term investments at end of periodnote (c)

2,365


2,210

3,236

* The holding company cash flow differs from the IFRS cash flow statement, which includes all cash flows in the period including those relating to both policyholder and shareholder funds. The holding company cash flow is therefore a more meaningful indication of the Group's central liquidity.

 

Notes

(a)   Net cash remittances comprise dividends and other transfers from business units that are reflective of emerging earnings and capital generation. In half year 2019 it includes £191 million of proceeds from the reduction in the Group's shareholding in ICICI Prudential.

(b)   Non-operating net cash flows principally relate to the repayment of debt, demerger costs and associated transactions and payments for distribution rights. In full year 2018, the amounts include the receipts from issuance of debt.

(c)   Including central finance subsidiaries.

 

I(iv)  Analysis of adjusted IFRS operating profit based on longer-term investment returns by driver from continuing long-term insurance businesses 

 

This schedule classifies the Group's adjusted IFRS operating profit based on longer-term investment returns (operating profit) from continuing long-term insurance businesses into the underlying drivers using the following categories:

 

-      Spread income represents the difference between net investment income and amounts credited to certain policyholder accounts. It excludes the operating investment return on shareholder net assets, which has been separately disclosed as expected return on shareholder assets.

-      Fee income represents profit driven by net investment performance, being asset management fees that vary with the size of the underlying policyholder funds, net of investment management expenses.

-      With-profits represents the pre-tax shareholders' transfer from the with-profits business for the period.

-      Insurance margin primarily represents profit derived from the insurance risks of mortality and morbidity.

-      Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses (see below).

-      Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. These exclude items such as restructuring costs, which are not included in the segment profit, as well as items that are more appropriately included in other categories (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate).

-      DAC adjustments comprise DAC amortisation for the period, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business written in the period.

 

(a)   Margin analysis of long-term insurance business - continuing operations

The following analysis expresses certain of the Group's sources of adjusted IFRS operating profit based on longer-term investment returns as a margin of policyholder liabilities or other relevant drivers. Details on the calculation of the Group's average policyholder liability balances are given in note (1).

 



Half year 2019



Asia 

US 

Group

total

Average

liability

Margin



£m

£m

£m

£m

bps



note (b)

note (c)


note (1)

note(2)

Spread income

119

230

349

65,174

107

Fee income

111

1,238

1,349

157,676

171

With-profits

41

-

41

43,294

19

Insurance margin

852

549

1,401



Margin on revenues

1,124

-

1,124



Expenses:







Acquisition costsnote (3)

(802)

(382)

(1,184)

2,809

(42)%


Administration expenses

(547)

(637)

(1,184)

225,483

(105)


DAC adjustmentsnote (4)

132

191

323



Expected return on shareholder assets

69

14

83





1,099

1,203

2,302



Share of related tax charges from joint ventures and associatenote (5)

(4)

-

(4)



Adjusted IFRS operating profit based on longer-term investment returns from continuing long-term business

1,095

1,203

2,298



 



Half year 2018 AERnote (7)



Asia 

US 

Group

total

Average

liability

Margin



£m

£m

£m

£m

bps



note (b)

note (c)


note (1)

note (2)

Spread income

112

295

407

54,268

150

Fee income

108

1,185

1,293

149,991

172

With-profits

30

-

30

34,032

18

Insurance margin

723

463

1,186



Margin on revenues

1,004

-

1,004



Expenses:







Acquisition costsnote (3)

(721)

(384)

(1,105)

2,552

(43)%


Administration expenses

(512)

(580)

(1,092)

208,441

(105)


DAC adjustmentsnote (4)

143

10

153



Expected return on shareholder assets

58

12

70





945

1,001

1,946



Share of related tax charges from joint ventures and associatenote (5)

(18)

-

(18)



Adjusted IFRS operating profit based on longer-term investment returns from continuing long-term business

927

1,001

1,928











Half year 2018 CERnotes (6)(7)



Asia 

US 

Total

Average

liability

Margin



£m

£m

£m

£m

bps



note (b)

note (c)


note (1)

 note (2)

Spread income

115

314

429

57,280

150

Fee income

110

1,260

1,370

158,567

173

With-profits

31

-

31

35,700

17

Insurance margin

750

491

1,241



Margin on revenues

1,042

-

1,042



Expenses:







Acquisition costsnote (3)

(749)

(408)

(1,157)

2,674

(43)%


Administration expenses

(526)

(617)

(1,143)

219,632

(104)


DAC adjustmentsnote (4)

148

11

159



Expected return on shareholder assets

60

13

73





981

1,064

2,045



Share of related tax charges from joint ventures and associatenote (5)

(18)

-

(18)



Adjusted IFRS operating profit based on longer-term investment returns from continuing long-term business

963

1,064

2,027



 

Notes to the tables throughout I(iv)

(1)   For Asia, opening and closing policyholder liabilities have been used to derive an average balance for the period, as a proxy for average balances throughout the period. The calculation of average liabilities for the US is generally derived from month-end balances throughout the period as opposed to opening and closing balances only. The average liabilities for fee income in the US have been calculated using daily balances instead of month-end balances in order to provide a more meaningful analysis of the fee income, which is charged on the daily account balance. Average liabilities for spread income are based on the general account liabilities to which spread income is attached. Average liabilities used to calculate the administration expenses margin exclude the REALIC liabilities reinsured to third parties prior to the acquisition by Jackson.

(2)   Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. The margin is on an annualised basis in which half year profits are annualised by multiplying by two.

(3)   The ratio of acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business.

(4)   The DAC adjustments contain a credit of £25 million in respect of joint ventures and associate in half year 2019 (half year 2018: £14 million).

(5)   Under IFRS, the Group's share of results from its investments in joint ventures and associate accounted for using the equity method is included in the Group's profit before tax on a net of related tax basis. These tax charges are shown separately in the analysis of Asia operating profit drivers in order for the contribution from the joint ventures and associate to be included in the margin analysis on a consistent basis as the rest of the Asia's operations.

(6)   The half year 2018 comparative information has been presented at both AER and CER to eliminate the impact of exchange translation. CER results are calculated by translating prior period results using the current period foreign exchange rates. All CER profit figures have been translated at current period average rates. For Asia, CER average liabilities have been translated using current period opening and closing exchange rates. For US, CER average liabilities have been translated at the current period month-end closing exchange rates.

(7)   The half year 2018 comparative results exclude the contribution from the UK and Europe operations, which have been classified as discontinued at 30 June 2019.

 

(b)   Margin analysis of long-term insurance business - Asia

 
















Half year 2019


Half year 2018 AER


Half year 2018 CERnote (6)




Average 




Average  




Average 




Profit 

liability 

Margin 


Profit  

liability 

Margin 


Profit 

liability 

Margin 



£m 

£m 

bps 


£m 

£m 

bps 


£m 

£m 

bps 

Long-term business


note (1)

note (2)



note (1)

note (2)



note (1)

note (2)

Spread income

119

21,816

109


112

17,872

125


115

18,515

124

Fee income

111

20,843

107


108

19,903

109


110

20,513

107

With-profits

41

43,294

19


30

34,032

18


31

35,700

17

Insurance margin

852




723




750



Margin on revenues

1,124




1,004




1,042



Expenses:













Acquisition costsnote (3)

(802)

1,978

(41)%


(721)

1,736

(42)%


(749)

1,806

(41)%


Administration expenses

(547)

42,659

(256)


(512)

37,775

(271)


(526)

39,028

(270)


DAC adjustmentsnote (4)

132




143




148



Expected return on shareholder assets

69




58




60





1,099




945




981



Share of related tax charges from joint ventures and associatenote (5)

(4)




(18)




(18)



Adjusted IFRS operating profit based on

longer-term investment returns

1,095




927




963



 

Analysis of Asia operating profit drivers

 

-    Spread income has increased on a CER basis by 3 per cent (AER: 6 per cent) to £119 million in half year 2019, with a decrease in the margin on a CER basis from 124 basis points (AER: 125 basis points) in half year 2018 to 109 basis points in half year 2019 predominantly reflecting the changes in investment mix, product and geographical mix as well as lower interest rates in the period.

-    Fee income has increased by 1 per cent on a CER basis (AER: 3 per cent) to £111 million in half year 2019, broadly in line with the increase in movement in average unit-linked liabilities.

-    Insurance margin has increased by 14 per cent on a CER basis (AER: 18 per cent), primarily reflecting the continued growth of the in-force book, which contains a relatively high proportion of protection products.

-    Margin on revenues has increased by 8 per cent on a CER basis (AER: 12 per cent) to £1,124 million in half year 2019, primarily reflecting higher premiums together with the effect of changes in product mix.

-    Acquisition costs have increased by 7 per cent on a CER basis (AER: 11 per cent) to £(802) million in half year 2019, compared to a 10 per cent increase in APE sales on a CER basis (AER : 14 per cent). The analysis above uses shareholder acquisition costs as a proportion of total APE. If with-profits sales were excluded from the denominator, the acquisition cost ratio would become 66 per cent (half year 2018: 69 per cent on a CER basis), the decrease being the result of product and geographical mix.

-    Administration expenses including renewal commissions have increased by 4 per cent on a CER basis (AER: 7 per cent) to £(547) million in half year 2019 as the business continues to expand. On a CER basis, the administration expense ratio has decreased from 270 basis points in half year 2018 to 256 basis points in half year 2019 as a result of changes in geographical and product mix.

 

(c)   Margin analysis of long-term insurance business - US

 



Half year 2019


Half year 2018 AER


Half year 2018 CERnote (6)




Average




Average




Average




Profit

liability

Margin


Profit

liability

Margin


Profit

liability

Margin



£m

£m

bps


£m

£m

bps


£m

£m

bps

Long-term business


note (1)

note (2)



note (1)

note (2)



note (1)

note (2)

Spread income

230

43,358

106


295

36,396

162


314

38,765

162

Fee income

1,238

136,833

181


1,185

130,088

182


1,260

138,054

183

Insurance margin

549




463




491



Expenses:













Acquisition costsnote (3)

(382)

831

(46)%


(384)

816

(47)%


(408)

868

(47)%


Administration expenses

(637)

182,824

(70)


(580)

170,666

(68)


(617)

180,604

(68)


DAC adjustments

191




10




11



Expected return on shareholder assets

14




12




13



Adjusted IFRS operating profit based on

longer-term investment returns

1,203




1,001




1,064



 

Analysis of US operating profit drivers

 

-      Spread income has decreased by 27 per cent on a CER basis (AER: 22 per cent) to £230 million in half year 2019, reflecting the combination of lower spread income and lower swap income. The reduction in spread income reflects the effect of lower invested asset yields. The decline in swap income is a result of the unfavourable impact of higher short-term interest rates over much of the period. The decline in spread margin to 106 basis points from 162 basis points at half year 2018 (on and AER and CER basis) in relation to average spread-related general account assets also reflects the full consolidation in the current period of the assets acquired with the John Hancock transaction in November 2018. Excluding the effect of the swaps transactions, the spread margin would have been 95 basis points (half year 2018: 133 basis points).

-      Fee income has decreased on a CER basis by 2 per cent (AER: increased by 4 per cent) to £1,238 million in half year 2019, primarily due to lower average separate account balances as a result of market depreciation during the second half of 2018. Fee income margin has decreased to 181 basis points from 183 basis points on a CER basis (AER: 182 basis points) primarily reflecting a change in product mix.

-      Insurance margin represents profits from insurance risks, including variable annuity guarantees and other sundry items. Insurance margin increased on a CER basis from £491 million (AER: £463 million) in half year 2018 to £549 million in half year 2019. The increase is due to higher income from variable annuity guarantees and a contribution from the John Hancock business acquired in the fourth quarter of 2018.

-      Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable, have decreased on a CER basis by 6 per cent (AER: 1 per cent). This primarily reflects a 4 per cent decrease in APE sales.

-      Administration expenses increased on a CER basis from £(617) million (AER £(580) million) in half year 2018 to £(637) million in half year 2019, primarily as a result of higher asset-based commissions. Excluding these asset-based commissions, the resulting administration expense ratio would be 34 basis points (half year 2018: 34 basis points on a CER basis; 33 basis points on AER basis).

-      DAC adjustments in half year 2019 was a positive £191 million (half year 2018: positive £11 million on a CER basis) due to a decrease in the DAC amortisation charge. The lower DAC amortisation charge in half year 2019 arises largely from a deceleration of amortisation of £148 million (half year 2018: acceleration of £(45) million on a CER basis) driven primarily by higher equity market returns in the first half of 2019. 

 

Analysis of adjusted IFRS operating profit based on longer-term investment returns for US insurance operations before and after acquisition costs and DAC adjustments

 



Half year 2019 £m


Half year 2018 AER £m


Half year 2018 CERnote (6) £m




Acquisition costs




Acquisition costs




Acquisition costs




Before acquisition costs and DAC adjustments

Incurred

Deferred

After acquisition costs and DAC adjustments


Before acquisition costs and DAC adjustments

Incurred

Deferred

After acquisition costs and DAC adjustments


Before acquisition costs and DAC adjustments

Incurred

Deferred

After acquisition costs and DAC adjustments

Total adjusted IFRS operating profit based on longer-term investment returns before acquisition costs and DAC adjustments

1,394

-

-

1,394


1,375

-

-

1,375


1,462

-

-

1,462

Less new business strain

-

(382)

285

(97)


-

(384)

290

(94)


-

(408)

308

(100)

Other DAC adjustments - amortisation of previously deferred acquisition costs:














-


Normal

-

-

(242)

(242)


-

-

(238)

(238)


-

-

(253)

(253)


(Accelerated) decelerated

-

-

148

148




(42)

(42)


-

-

(45)

(45)

Total adjusted IFRS operating profit based on longer-term investment returns

1,394

(382)

191

1,203


1,375

(384)

10

1,001


1,462

(408)

10

1,064

 

Analysis of adjusted IFRS operating profit based on longer-term investment returns for US by product

 



Half year 2019 £m


Half year 2018 £m


Half year 2019 vs half year 2018

%





AER

CERnote (6)


AER

CERnote (6)

Spread business

123


153

163


(20)%

(25)%

Fee business

1,048


791

841


32%

25%

Life and other business

32


57

60


(44)%

(47)%

Total insurance business

1,203


1,001

1,064


20%

13%

Asset management and broker-dealer

12


1

1


1,100%

1,100%

Total US

1,215


1,002

1,065


21%

14%

 

The analysis of adjusted IFRS operating profit based on longer-term investment returns for US by product represents the net profit generated by each line of business after allocation of costs. Broadly:

 

-    Spread business is the net adjusted operating profit for fixed annuity, fixed indexed annuity and guaranteed investment contracts and largely comprises spread income less costs.

-    Fee business represents profit from variable annuity products. As well as fee income, revenue for this product line includes spread income from investments directed to the general account and other variable annuity fees included in insurance margin.

-    Life and other business include profit from the REALIC business and other closed life books. Revenue allocated to this product line includes spread income and premiums and policy charges for life protection, which are included in insurance margin after claim costs.

 

I(v)   Asia operations - analysis of adjusted IFRS operating profit based on longer-term investment returns by business unit

 

(a)   Analysis of adjusted IFRS operating profit based on longer-term investment returns by business unit

Adjusted operating profit based on longer-term investment returns for Asia operations are analysed below. The table below presents the half year 2018 results on both AER and CER bases to eliminate the impact of exchange translation.

 


 2019 £m


 2018 £m


Half year 2019 vs half year 2018 %


 2018 £m


 

Half year


Half year

AER

Half year

CER


AER

CER


Full year

AER

Hong Kong

260


190

202


37%

29%


443

Indonesia

200


205

212


(2)%

(6)%


416

Malaysia

109


97

99


12%

10%


194

Philippines

26


20

21


30%

24%


43

Singapore

176


143

149


23%

18%


329

Thailand

48


46

48


4%

0%


113

Vietnam

83


63

67


32%

24%


149

South-east Asia including

Hong Kong

902


764

798


18%

13%


1,687

China JV

69


62

61


11%

13%


143

Taiwan

24


19

20


26%

20%


51

Other

30


33

32


(9)%

(6)%


51

Non-recurrent items*

76


69

72


10%

6%


94

Total insurance operations

1,101


947

983


16%

12%


2,026

Share of related tax charges from joint ventures and associate

(4)


(18)

(18)


78%

78%


(40)

Development expenses

(2)


(2)

(2)


-

-


(4)

Total long-term business

1,095


927

963


18%

14%


1,982

Asset management (Eastspring Investments)

103


89

92


16%

12%


182

Total Asia

1,198


1,016

1,055


18%

14%


2,164

* In half year 2019, the adjusted IFRS operating profit based on longer-term investment returns for Asia insurance operations included a net credit of £76 million (half year 2018: £69 million; full year 2018: £94 million) representing a small number of items that are not expected to reoccur, including the impact of a refinement to the run-off of the allowance for prudence within technical provisions.

 

(b)   Analysis of Eastspring Investments operating profit for the period

 


2019 £m


2018 £m


Half year


Half year

Full year

Operating income before performance-related feesnote (1)

239


216

424

Performance-related fees

1


2

17

Operating income (net of commission)note (2)

240


218

441

Operating expensenote (2)

(121)


(116)

(232)

Group's share of tax on joint ventures' operating profit

(16)


(13)

(27)

Operating profit for the period

103


89

182

Average funds under management

£162.4bn


£139.5bn

£146.3bn

Margin based on operating income*

29bps


31bps

29bps

Cost/income ratio

51%


54%

55%

 

Notes

(1)   Operating income before performance-related fees for Eastspring Investments can be further analysed as follows:

 










       

Retail

Margin of FUM*

Institutional

Margin of FUM*

Total

Margin of FUM*



£m

bps 

£m 

bps 

£m 

bps 


30 Jun 2019

148

51

91

18

239

29


30 Jun 2018

128

54

88

19

216

31


31 Dec 2018

252

50

172

18

424

29

* Margin represents operating income before performance-related fees as a proportion of the related funds under management (FUM). Half year figures have been annualised by multiplying by two. Monthly closing internal and external funds managed by Eastspring have been used to derive the average. Any funds held by the Group's insurance operations that are managed by third parties outside the Prudential Group are excluded from these amounts.

   Cost/income ratio represents cost as a percentage of operating income before performance-related fees.

   Institutional includes internal funds.

(2)     Operating income and expense include the Group's share of contribution from joint ventures (but excludes any contribution from associates). In the condensed consolidated income statement of the Group IFRS basis results, the net post-tax income of the joint ventures and associates is shown as a single line item.

 

(c)   Eastspring Investments total funds under management

Eastspring Investments, the Group's asset management business in Asia, manages funds from external parties and also funds for the Group's insurance operations. The table below analyses the total funds under management managed by Eastspring Investments.

 


2019 £bn


2018 £bn


30 Jun


30 Jun

31 Dec

External funds under management*

67.0


52.4

61.1

Internal funds under management

102.5


85.8

90.2

Total funds under management

169.5


138.2

151.3

* The external funds under management for Eastspring Investments include Asia Money Market Funds at 30 June 2019 of £10.5 billion (30 June 2018: £10.0 billion; 31 December 2018: £11.6 billion).

 

I(vi)    Additional financial information on the discontinued UK and Europe operations

 

(a)   Analysis of profit for the period by driver

 


2019 £m


2018 £m


Half year


Half year

Full year

Core profit from long-term business

345


255

519

Shareholder-backed annuity new business

8


3

9

Changes in longevity assumption basis

127


-

441

Other management actions to improve solvency

16


63

58

Provision for guaranteed minimum pension equalisation

-


-

(55)

Insurance recoveries in respect of the review of past annuity sales

-


166

166

Operating profit from long-term business

496


487

1,138

General insurance commissions

2


19

19

Asset management operations

239


272

477

Head office costs

(21)


-

-

Restructuring costs

(29)


(42)

(109)

Adjusted IFRS operating profit based on longer-term investment returns

687


736

1,525

Fair value loss on debt extinguishmentnote

(169)


-

-

Other non-operating profit (loss)

299


(635)

(474)

Profit before tax

817


101

1,051

Tax charge attributable to shareholders' returns

(172)


(18)

(196)

Profit for period, net of related tax

645


83

855

 

Note

As described in note C6.1(vi) of the Group IFRS basis results, during the first half of 2019, the Group agreed to change the terms of certain debt holdings to enable M&GPrudential to be substituted as the issuer of the instruments (in the place of Prudential plc). The change in fair value of debt, driven by the higher coupon, will be borne by M&GPrudential post the proposed demerger and hence it has been included in the results from discontinued operations in the table above. The 2018 comparative results include a £(513) million loss arising on the reinsurance of part of the UK annuity portfolio to Rothesay Life.

 

(b)   Analysis of M&G Investments operating profit for the period

 


2019 £m


2018 £m


Half year


Half year

Full year

Asset management fee income

511


552

1,098

Other income

12


1

2

Operating income before performance-related feesnote

523


553

1,100

Staff costs

(176)


(190)

(384)

Other costs

(122)


(107)

(270)

Operating expense

(298)


(297)

(654)

Underlying profit before performance-related fees

225


256

446

Performance-related fees

7


8

15

Share of associate's results

7


8

16

Operating profit based on longer-term investment returns

239


272

477

Average funds under management

£263.8bn


£285.3bn

£276.6bn

Margin based on operating income*

40bps


39bps

40bps

Cost/income ratio

57%


54%

59%

 

Note

Operating income before performance-related fees can be further analysed as follows:

 


       

Retail

Margin of FUM*

Institutional

Margin of FUM*

Total

Margin of FUM*



£m

bps 

£m 

bps 

£m 

bps 


30 Jun 2019

280

83

243

25

523

40


30 Jun 2018

331

84

222

21

553

39


31 Dec 2018

662

85

438

22

1,100

40

* Margin represents operating income before performance related fees as a proportion of the related funds under management (FUM). Half year figures have been annualised by multiplying by two. Monthly closing internal and external funds managed by the respective entity have been used to derive the average. Any funds held by the Group's insurance operations that are managed by third parties outside the Prudential Group are excluded from these amounts.

   Cost/income ratio represents operating expense as a percentage of operating income before performance-related fees.

‡   Institutional includes internal funds.

 

(c)    M&G Investments total funds under management

M&G Investments, the asset management business of M&GPrudential, manages funds from external parties and also funds for the Group's insurance operations. The table below analyses the total funds under management managed by M&G Investments.

 


2019 £bn


2018 £bn


30 Jun


30 Jun

31 Dec

External funds under management

153.0


165.5

146.9

Internal funds under management

123.7


120.3

118.2

Total funds under management

276.7


285.8

265.1

 

I(vii) Pro forma Prudential Group IFRS shareholders' equity, excluding M&GPrudential, as at 30 June 2019

 

The pro forma impact on the Prudential Group IFRS shareholders' equity below illustrates the estimated effect of the proposed demerger of M&GPrudential from Prudential plc as if it had completed as at 30 June 2019, is provided in the table below.

 



30 Jun

 2019 £bn

IFRS shareholders' equity as reported in the statement of financial position

19.7

Adjustments:note (1)



Remove IFRS shareholders' equity of the discontinued M&GPrudential operations

(8.3)


Dividends to be remitted by M&GPrudential to Prudential plc prior to demerger

3.3


Directly attributable transaction costs to be borne by Prudential plc

(0.1)



(5.1)

Pro forma IFRS shareholders' equitynote (2)

14.6

 

Notes

(1)   The adjustments as shown in the table above, which result in a decrease in IFRS shareholders' equity of £5.1 billion, represent the estimated impact on the retained Prudential Group's IFRS shareholders' equity of the proposed demerger. The adjustments, which are calculated based on the information and assumptions at 30 June 2019 and therefore, do not necessarily represent the actual financial position following the proposed demerger, include:

 

-   The removal of the IFRS shareholders' equity of M&GPrudential as at 30 June 2019 of £8.3 billion, as shown in note D2.2;

-   The expected proceeds of £3.0 billion from a pre-demerger dividend to be paid by M&GPrudential to Prudential plc, shortly before demerger, together with planned dividends of £0.3 billion expected to be paid earlier. All dividends are subject to the customary legal and governance considerations required before approval by the M&GPrudential Board; and

-   £0.1 billion of expected transaction related costs associated with the proposed demerger that have yet to be incurred at 30 June 2019, principally relating to fees to advisors. Further information on the total costs associated with the demerger are set out in the CFO Report.

 

The expected transfer of £3.2 billion of debt to M&GPrudential prior to the proposed demerger by substituting M&GPrudential in the place of Prudential plc as issuer of such debt, as discussed in note C6.1, does not result in a separate pro forma adjustment to IFRS shareholders equity.

 

(2)   No account has been taken of any trading and other changes in financial position of the Prudential Group after 30 June 2019, thus the pro forma IFRS shareholders' equity does not reflect the actual IFRS shareholders' equity of the retained Prudential Group following the completion of the demerger.

 

I(viii)    Return on IFRS shareholders' funds

Operating return on IFRS shareholders' funds is calculated as operating profit net of tax and non-controlling interests divided by opening shareholders' equity. Total comprehensive return on shareholders' funds is calculated as IFRS total comprehensive income for the period net of tax and non-controlling interests divided by opening shareholders' equity. Detailed reconciliation of operating profit based on longer-term investment returns to IFRS profit before tax for continuing operations is shown in note B1.1 to the Group IFRS basis results. The reconciliation for discontinued operations is shown in note I(vi).

 

 


Half year 2019 £m


Asia

US

Other

Total continuing operations

Discontinued UK and Europe operations

Total

Group

1,198

1,215

(389)

2,024

687

2,711

Tax on operating profit

(168)

(203)

39

(332)

(146)

(478)

Profit attributable to non-controlling interests

(4)

-

(1)

(5)

-

(5)

1,026

1,012

(351)

1,687

541

2,228

Non-operating profit (loss), net of tax

607

(1,222)

(182)

(797)

104

(693)

1,633

(210)

(533)

890

645

1,535

Other comprehensive income, net of tax and non-controlling interests

84

1,748

(82)

1,750

4

1,754

1,717

1,538

(615)

2,640

649

3,289

Opening shareholders' funds

6,419

5,624

(3,494)

8,549

8,700

17,249

32%

36%

(20)%

39%

12%

26%

Annualised total comprehensive return on shareholders' funds (%)*

53%

55%

(35)%

62%

15%

38%

* Half year profits are annualised by multiplying by two.

 


Half year 2018* £m


Asia

US

Other

Total continuing operations

Discontinued UK and Europe operations

Total

Group

1,016

1,002

(349)

1,669

736

2,405

Tax on operating profit

(151)

(177)

41

(287)

(142)

(429)

Profit attributable to non-controlling interests

-

-

(1)

(1)

-

(1)

865

825

(309)

1,381

594

1,975

Non-operating profit (loss), net of tax

(326)

145

72

(109)

(511)

(620)

539

970

(237)

1,272

83

1,355

Other comprehensive income, net of tax and non-controlling interests

22

(790)

(66)

(834)

62

(772)

561

180

(303)

438

145

583

Opening shareholders' funds

5,925

5,248

(3,331)

7,842

8,245

16,087

29%

31%

(19)%

35%

14%

25%

Annualised total comprehensive return on shareholders' funds (%)

19%

7%

(18)%

11%

4%

7%

* The half year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations as at 30 June 2019.

  Half year profits are annualised by multiplying by two.

 


Full year 2018* £m


Asia

US

Other

Total continuing operations

Discontinued UK and Europe operations

Total

Group

2,164

1,919

(781)

3,302

1,525

4,827

Tax on operating profit

(308)

(301)

110

(499)

(293)

(792)

Profit attributable to non-controlling interests

(1)

-

(2)

(3)

-

(3)

1,855

1,618

(673)

2,800

1,232

4,032

Non-operating profit (loss), net of tax

(496)

(134)

(15)

(645)

(377)

(1,022)

1,359

1,484

(688)

2,155

855

3,010

Other comprehensive income, net of tax and non-controlling interests

221

(754)

(185)

(718)

57

(661)

1,580

730

(873)

1,437

912

2,349

Opening shareholders' funds

5,925

5,248

(3,331)

7,842

8,245

16,087

31%

31%

(20)%

36%

15%

25%

Total comprehensive return on shareholders' funds (%)

27%

14%

(26)%

18%

11%

15%

* The full year 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations as at 30 June 2019.

 

Return on shareholders' funds based on total profit for the period

 

Total return on shareholders' funds is calculated as IFRS profit for the period net of tax and non-controlling interests divided by opening shareholders' equity.

 


2019 £m


2018 £m


Half year*


Half year*

Full year

Total profit for the period, net of tax and minority interest

1,535


1,355

3,010

Opening Shareholders' funds

17,249


16,087

16,087

Return on shareholders' funds

18%


17%

19%

* Half year profits are annualised by multiplying by two.

 

II    Calculation of alternative performance measures

The half year 2019 report uses alternative performance measures (APMs) to provide more relevant explanations of the Group's financial position and performance. This section sets out explanations for each APM and reconciliations to relevant IFRS balances.

 

II(i)   Reconciliation of adjusted IFRS operating profit based on longer-term investment returns from continuing operations to profit before tax

 

Adjusted IFRS operating profit attributable to shareholders based on longer-term investment returns from continuing operations (operating profit) presents the operating performance of the business. This measurement basis adjusts for the following items within total IFRS profit before tax:

 

-   Short-term fluctuations in investment returns on shareholder-backed business;

-   Amortisation of acquisition accounting adjustments arising on the purchase of business;

-   Gain or loss on corporate transactions, such as disposals undertaken in the period; and

-   Profit for the period from discontinued operations.

 

More details on how adjusted IFRS operating profit based on longer-term investment returns is determined are included in note B1.3 of the Group IFRS basis results.

 

II(ii)  Calculation of IFRS gearing ratio

 

IFRS gearing ratio is calculated as net core structural borrowings of shareholder-financed businesses divided by closing IFRS shareholders' equity plus net core structural borrowings.

 


2019 £m


2018 £m


30 Jun


30 Jun

31 Dec

Core structural borrowings of shareholder-financed businesses

7,441


6,367

7,664

Less holding company cash and short-term investments

(2,365)


(2,210)

(3,236)

Net core structural borrowings of shareholder-financed businesses

5,076


4,157

4,428

Closing shareholders' equity

19,672


15,882

17,249

Closing shareholders' equity plus net core structural borrowings

24,748


20,039

21,677

IFRS gearing ratio

21%


21%

20%

 

II(iii) Calculation of IFRS shareholders' funds per share

 

IFRS shareholders' funds per share is calculated as closing IFRS shareholders' equity divided by the number of issued shares at the end of the period (30 June 2019: 2,600 million shares; 30 June 2018: 2,592 million shares; 31 December 2018: 2,593 million shares).

 




30 Jun 2019



Asia

US

Other

Total

continuing

operations

Discontinued

UK and

Europe

operations

Total Group

Closing IFRS shareholders' equity (£ million)

7,643

6,752

(3,003)

11,392

8,280

19,672

Shareholders' funds per share (pence)

294p

260p

(116)p

438p

319p

757p











30 Jun 2018



Asia

US

Other

Total

continuing

operations

Discontinued

UK and

Europe

operations

Total Group

Closing IFRS shareholders' equity (£ million)

5,740

5,100

(3,004)

7,836

8,046

15,882

Shareholders' funds per share (pence)

221p

197p

(116)p

302p

311p

613p











31 Dec 2018



Asia

US

Other

Total

 continuing

 operations

Discontinued

UK and

Europe

operations

Total Group

Closing IFRS shareholders' equity (£ million)

6,419

5,624

(3,494)

8,549

8,700

17,249

Shareholders' funds per share (pence)

248p

217p

(135)p

330p

335p

665p

 

II(iv) Calculation of asset management cost/income ratio

 

The asset management cost/income ratio is calculated as asset management operating expenses, adjusted for commission and joint venture contribution, divided by asset management total IFRS revenue, adjusted for commission, joint venture contribution, performance-related fees and non-operating items.

 


Eastspring Investments - continuing


 2019 £m


2018 £m


Half year


Half year

Full year

Operating income before performance-related fees

239


216

424

Share of joint venture revenue

(93)


(99)

(188)

Commission

68


59

118

Performance-related fees

1


2

17

IFRS revenue

215


178

371






Operating expense

121


116

232

Share of joint venture expense

(40)


(58)

(100)

Commission

68


59

118

IFRS charges

149


117

250

Cost/income ratio: operating expense/operating income before performance-related fees

51%


54%

55%







M&GPrudential asset management - discontinued


 2019 £m


2018 £m


Half year


Half year

Full year

Operating income before performance-related fees

523


553

1,100

Commission

132


155

313

Performance-related fees

7


8

15

Investment return

-


-

(14)

Short-term fluctuations in investment returns on shareholder-backed business

7


(6)

(15)

IFRS revenue

669


710

1,399






Operating expense used in cost/income ratio

298


297

654

Investment return

-


-

(14)

Commission

132


155

313

IFRS charges

430


452

953

Cost/income ratio: operating expense/operating income before performance-related fees

57%


54%

59%

 

II(v)    Reconciliation of Asia renewal insurance premium to gross premiums earned

 

Asia renewal insurance premium is calculated as IFRS gross earned premiums less new business premiums and adjusted for the contribution from joint ventures.

 


2019 £m


2018 £m


Half year


Half year

Full year

Asia renewal insurance premium

7,093


6,076

12,856

Add: General insurance premium

50


42

90

Add: IFRS gross earned premium from new regular and single premium business

2,406


2,237

4,809

Less: Renewal premiums from joint ventures

(693)


(619)

(1,286)

Asia segment IFRS gross premiums earned

8,856


7,736

16,469

 

II(vi)   Reconciliation of APE new business sales to gross premiums earned

 

The Group reports APE new business sales as a measure of the new policies sold in the period. This differs from the IFRS measure of gross premiums earned as shown below:

 


2019 £m


2018* £m


Half year


Half year

Full year

Annual premium equivalents (APE) from continuing operations

2,809


2,552

5,286

Adjustment to include 100% of single premiums on new business sold in the periodnote (a)

8,762


8,356

15,966

Premiums from in-force business and other adjustmentsnote (b)

4,722


3,878

12,911

Gross premiums earned from continuing operations

16,293


14,786

34,163






Annual premiums equivalents (APE) from discontinued UK and Europe operations

705


770

1,516

Adjustment to include 100% of single premiums on new business sold in the periodnote (a)

5,503


6,021

12,043

Premiums from in-force business and other adjustmentsnote (b)

(301)


(236)

(498)

Gross premiums earned from discontinued operations

5,907


6,555

13,061

* The 2018 comparative results have been re-presented from those previously published to reflect the Group's UK and Europe operations as discontinued operations as at 30 June 2019.

 

Notes

(a)   APE new business sales only include one tenth of single premiums, recorded on policies sold in the period. Gross premiums earned include 100 per cent of such premiums.

(b)   Other adjustments principally include amounts in respect of the following:

-      Gross premiums earned include premiums from existing in-force business as well as new business. The most significant amount is recorded in Asia, where a significant portion of regular premium business is written. Asia in-force premiums form the vast majority of the other adjustment amount;

-      In October 2018, Jackson entered into a 100 per cent reinsurance agreement with John Hancock Life Insurance Company to acquire a closed block of group pay-out annuity business. The transaction resulted in an addition to gross premiums earned of £3.7 billion. No amounts were included in APE new business sales;

-      APE includes new policies written in the period which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts and in M&GPrudential for certain unit-linked savings and similar contracts. These are excluded from gross premiums earned and recorded as deposits;

-      APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and

-      For the purpose of reporting APE new business sales, the Group's share of amounts sold by the Group's insurance joint ventures and associates are included. Under IFRS, joint ventures and associates are equity accounted and so no amounts are included within gross premiums earned.

 

II(vii)  Reconciliation between IFRS and EEV shareholders' equity

 

The table below shows the reconciliation of EEV shareholders' equity and IFRS shareholders' equity at the end of the period:


2019 £m


2018 £m


30 Jun


30 Jun

31 Dec

EEV shareholders' equity

53,416


47,443

49,782

Less: Value of in-force business of long-term businessnote (a)

(35,567)


(31,555)

(33,013)

Deferred acquisition costs assigned zero value for EEV purposes

10,443


9,652

10,077

Othernote (b)

(8,620)


(9,658)

(9,597)

IFRS shareholders' equity

19,672


15,882

17,249

 

Notes

(a)   The EEV shareholders' equity comprises the present value of the shareholders' interest in the value of in-force business, total net worth of long-term business operations and IFRS shareholders' equity of asset management and other operations. The value of in-force business reflects the present value of expected future shareholder cash flows from long-term in-force business which are not captured as shareholders' interest on an IFRS basis. Total net worth represents the net assets for EEV reporting that reflect the regulatory basis position, with adjustments to achieve consistency with the IFRS treatment of certain items as appropriate.

(b)   Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value total net worth for long-term insurance operations. These also include the mark-to-market value movements of the Group's core structural borrowings which are fair valued under EEV but are held at amortised cost under IFRS. The most significant valuation differences relate to changes in the valuation of insurance liabilities. For example, in Jackson, IFRS liabilities are higher than the local regulatory basis as they are principally based on policyholder account balances (with a deferred acquisition costs recognised as an asset), whereas the local regulatory basis used for EEV reporting is based on expected future cash flows due to the policyholder on a prudent basis, with the consideration of an expense allowance, as applicable, but with no separate deferred acquisition cost asset.

 

II(viii)   Reconciliation of EEV operating profit based on longer-term investment returns to profit for the period

 

To the extent applicable, the presentation of the EEV profit for the period is consistent in the classification between operating and non-operating results with the basis that the Group applies for the analysis of IFRS basis results. Operating results based on longer-term investment returns are determined following the EEV Principles issued by the European Insurance CFO Forum in 2016.

 

Non-operating results comprise:

 

-    Short-term fluctuations in investment returns;

-    Mark-to-market value movements on core structural borrowings;

-    Effect of changes in economic assumptions; and

-    The impact of corporate transactions undertaken in the period.

 

More details on how EEV profit for the period is determined and the components of EEV operating profit are included in note 11 of the supplementary EEV basis of results.

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
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